<PAGE>
Filed pursuant to Rule 424(b)(5)
File No. 333-63305
PROSPECTUS SUPPLEMENT
(To Prospectus dated February 23, 1999)
$1,176,000,000 (Approximate)
GREEN TREE
Seller and Servicer
Certificates for Home Equity Loans
Series 1999-A
----------------
The Certificates will consist of 13 classes, but we are offering only
the following classes now:
<TABLE>
<CAPTION>
Approximate Pass-Through Underwriting Proceeds to
Class Principal Amount(1) Rate Price to Public(2) Discount Company(3)
- ----- ------------------- ------------- ------------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
A-1A ARM................ $ 150,000,000 (4) 100.0000000% 0.235% 99.7650000%
A-1B ARM................ $ 150,000,000 (5) 100.0000000% 0.235% 99.7650000%
A-1..................... $ 282,000,000 5.59% 99.9962715% 0.175% 99.8212715%
A-2..................... $ 135,000,000 5.78% 99.9836439% 0.250% 99.7336439%
A-3..................... $ 131,000,000 5.98% 99.9840713% 0.300% 99.6840713%
A-4..................... $ 59,500,000 6.18% 99.9967807% 0.375% 99.6217807%
A-5..................... $ 67,500,000 6.13% 99.9918169% 0.385% 99.6068169%
A-6 IO.................. (6) 5.50% 10.2075679% 0.100%(7) 10.1973603%
M-1..................... $ 72,000,000 6.92%(8) 99.9921438% 0.500% 99.4921438%
M-2..................... $ 61,200,000 7.45%(8) 99.9701441% 0.550% 99.4201441%
B-1..................... $ 43,800,000 8.97%(8) 99.9852310% 0.600% 99.3852310%
B-2A.................... $ 24,000,000 7.44%(8) 99.9984801% 0.600% 99.3984801%
-------------- -------------- ---------- --------------
Total................... $1,176,000,000 $1,188,157,419 $3,527,649 $1,184,629,770
============== ============== ========== ==============
</TABLE>
- --------
(1) May vary plus or minus 5%.
(2) Plus any accrued interest beginning on March 18, 1999.
(3) Before deducting expenses, which we estimate to be $500,000.
(4) The lesser of one-month LIBOR plus 0.26% or the Available Funds Pass-
Through Rate, but in no case more than 14%.
(5) The lesser of one-month LIBOR plus 0.28% or the Available Funds Pass-
Through Rate, but in no case more than 14%.
(6) Interest on the Class A-6 IO Certificates will be based on a notional
principal amount. That notional principal amount will equal $120,000,000
(or the Pool Scheduled Principal Balance, if less) for the first 24 months
and will equal zero thereafter.
(7) The underwriting discount for the Class A-6 IO Certificate has been
calculated as a percentage of the dollar amount of the price to public for
such Certificate.
(8) Or the weighted average of the rates on the loans, if less.
Investing in the Certificates involves certain risks. Prospective
investors should consider carefully the Risk Factors beginning on page S-13 in
this prospectus supplement and on page 8 in the prospectus.
----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The Attorney General of the State of New York has not passed on or endorsed
the merits of this offering. Any representation to the contrary is unlawful.
These Certificates will be delivered through the Same-Day Funds Settlement
System of the Depository Trust Company on or about March 18, 1999.
The underwriters named below will offer these securities to the public at the
offering price listed on this cover page and they will receive the discount
listed above. See "Underwriting" on page S-80 in this prospectus supplement and
on page 51 in the prospectus.
----------------
Merrill Lynch & Co.
Chase Securities Inc.
Credit Suisse First Boston
First Union Capital Markets
Lehman Brothers
The date of this prospectus supplement is February 23, 1999.
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary of the Terms of the Certificates................................. S-4
Risk Factors............................................................. S-13
Structure of the Transaction............................................. S-14
Use of Proceeds.......................................................... S-14
The Loans................................................................ S-15
Yield and Prepayment Considerations...................................... S-36
Green Tree Financial Corporation......................................... S-46
Description of the Certificates.......................................... S-47
Description of the Class B-2 Limited Guaranty............................ S-74
Certain Federal Income Tax Consequences.................................. S-75
ERISA Considerations..................................................... S-76
Underwriting............................................................. S-80
Legal Matters............................................................ S-81
Annex I.................................................................. A-1
Prospectus
Important Notice about Information Presented in this Prospectus and the
Accompanying Prospectus Supplement...................................... 2
Reports to Holders of the Certificates................................... 2
Where You Can Find More Information...................................... 2
Summary of the Terms of the Certificates ................................ 3
Risk Factors............................................................. 8
The Trust Fund........................................................... 9
Use of Proceeds.......................................................... 10
Green Tree Financial Corporation......................................... 10
Yield Considerations..................................................... 11
Maturity and Prepayment Considerations................................... 11
Description of the Certificates.......................................... 12
Certain Legal Aspects of the Loans; Repurchase Obligations............... 23
ERISA Considerations..................................................... 32
Certain Federal Income Tax Consequences.................................. 34
Legal Investment Considerations.......................................... 50
Ratings.................................................................. 51
Underwriting............................................................. 51
Legal Matters............................................................ 52
Experts.................................................................. 52
</TABLE>
No dealer, salesperson or other individual has been authorized to give any
information or make any representations not contained in this prospectus
supplement or the prospectus in connection with the offering covered by this
prospectus supplement and prospectus. If given or made, such information or
representations must not be relied upon as having been authorized by Green Tree
Financial Corporation or the underwriters. This prospectus supplement and
prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, the Certificates in any jurisdiction where, or to any person to whom,
it is unlawful to make such offer or solicitation. Neither the delivery of this
prospectus supplement and prospectus nor any sale made hereunder shall, under
any circumstances, create an implication that there has not been any change in
the facts set forth in this prospectus supplement and prospectus or in the
affairs of the Green Tree Home Equity Loan Trust 1999-A since the date hereof.
This document consists of a prospectus supplement and a prospectus. The
prospectus provides general information about Green Tree Financial Corporation
("Green Tree" or the "Company"), about Green Tree's home equity lending
business, and about any series of certificates for home equity loans that Green
Tree may wish to sell. This prospectus supplement contains more detailed
information about this series of certificates. Since the terms of this series
may differ from the general information provided
S-2
<PAGE>
in the prospectus, you should rely on the information in this prospectus
supplement rather than any different information in the prospectus.
If you have received a copy of this prospectus supplement and prospectus in
an electronic format, and if the legal prospectus delivery period has not
expired, you may obtain a paper copy of this prospectus supplement and
prospectus from Green Tree or an underwriter by asking for it.
No prospectus regarding these Certificates has been or will be prepared in
the United Kingdom pursuant to the United Kingdom Public Offers of Securities
Regulation 1995. These Certificates may not be offered or sold, or re-offered
or re-sold, to persons in the United Kingdom, except (1) to persons whose
ordinary activities involve them in acquiring, holding, managing and disposing
of investments (as principal or agent) for the purpose of their businesses, or
(2) in circumstances that will not constitute or result in an offer to the
public in the United Kingdom within the meaning of the United Kingdom Public
Offers of Securities Regulation 1995. You may not pass this prospectus
supplement and prospectus, or any other document inviting applications or
offers to purchase Certificates or offering Certificates for purchase, to any
person in the United Kingdom who (1) does not fall within article 11(3) of the
Financial Services Act 1986 (Investment Advisements) (Exemptions) Order 1996 or
(2) is not otherwise a person to whom passing this prospectus supplement and
prospectus would be lawful.
S-3
<PAGE>
SUMMARY OF THE TERMS OF THE CERTIFICATES
This summary highlights selected information regarding the Certificates, and
does not contain all of the information that you need to consider in making
your investment decision. To understand all of the terms of the Certificates,
read this entire prospectus supplement and the accompanying prospectus.
The 13 classes of Certificates for Home Equity Loans, Series 1999-A (the
"Certificates") listed on the table below will represent interests in a trust
consisting of a pool of home equity loans.
<TABLE>
<CAPTION>
Pass-Through Approximate S&P Fitch
Class Rate Principal Amount(1) Rating Rating
- ----- ------------ ------------------- ------ ------
<S> <C> <C> <C> <C>
A-1A ARM......................... (2) $150,000,000 AAA AAA
A-1B ARM......................... (3) 150,000,000 AAA AAA
A-1.............................. 5.59% 282,000,000 AAA AAA
A-2.............................. 5.78% 135,000,000 AAA AAA
A-3.............................. 5.98% 131,000,000 AAA AAA
A-4.............................. 6.18% 59,500,000 AAA AAA
A-5.............................. 6.13% 67,500,000 AAA AAA
A-6 IO........................... 5.50% (4) AAAr AAA
M-1.............................. 6.92%(5) 72,000,000 AA AA
M-2.............................. 7.45%(5) 61,200,000 A A
B-1.............................. 8.97%(5) 43,800,000 BBB BBB
B-2A............................. 7.44%(5) 24,000,000 BBB BBB
B-2(6)........................... 8.97%(5) 24,000,000 BBB- BBB+
</TABLE>
- -------
(1) May vary plus or minus 5%.
(2) The lesser of one-month LIBOR plus 0.26% or the Available Funds Pass-
Through Rate, but in no case more than 14%.
(3) The lesser of one-month LIBOR plus 0.28% or the Available Funds Pass
Through Rate, but in no case more than 14%.
(4) Interest on the Class A-6 IO Certificates will be based on a notional
principal amount. That notional principal amount will equal $120,000,000
(or the Pool Scheduled Principal Balance, if less) for the first 24 months
and will equal zero thereafter.
(5) Or the weighted average of the rates on the loans, if less.
(6) Green Tree will retain the Class B-2 Certificates initially, but may sell
them later pursuant to this prospectus supplement.
Seller and Servicer........ Green Tree Financial Corporation, 1100 Landmark
Towers, 345 St. Peter Street, St. Paul, Minnesota
55102, telephone: (651) 293-3400.
Trustee.................... U.S. Bank Trust National Association, St. Paul,
Minnesota.
Payment Date............... The fifteenth day of each month, or if that day
is not a regular business day, the next regular
business day. The first payment date will be
April 15, 1999.
Record Date................ The business day immediately prior to the payment
date (for example, if the payment date is April
15, the record date would be April 14, assuming
that April 14 is a regular business day).
S-4
<PAGE>
Description of
Certificates............... The Class A-1A ARM, Class A-1B ARM, Class A-1,
Class A-2, Class A-3, Class A-4, Class A-5, and
Class A-6 IO Certificates are senior
certificates. We call all of these certificates
the "Class A Certificates."
The Class M-1 and Class M-2 Certificates are
subordinated certificates. We call these
certificates the "Class M Certificates."
The Class B-1, Class B-2A and Class B-2
Certificates are also subordinated certificates.
We call these certificates the "Class B
Certificates."
Distributions on the
Certificates............ Distributions on the Certificates on any payment
date will be made primarily from amounts
collected during the prior calendar month on the
home equity loans comprising the pool (the
"Amount Available"). On each payment date, the
Trustee will apply these amounts to make
distributions of principal and interest on the
Certificates in the following order of priority:
- payment of the monthly servicing fee, if
Green Tree is no longer the servicer;
- Class A interest;
- Class M-1 interest;
- Class M-2 interest;
- Class B-1 interest;
- Class A principal (other than the Class A-6
IO Certificates);
- Class M-1 principal;
- Class M-2 principal;
- Class B-1 principal;
- Class B-2A interest;
- Class B-2A principal;
- Class B-2 interest;
- Class B-2 principal;
- payment of any additional amounts due on the
Class A-1A ARM and Class A-1B ARM
Certificates because of the "Available Funds
Pass-Through Rate" limitation on their
respective Pass-Through Rates;
- payment of the monthly servicing fee to
Green Tree; and
- Class B-2A additional principal.
See "Description of the Certificates--Payments on
Loans" for a detailed description of the amounts
that will constitute the Amount Available for any
payment due.
S-5
<PAGE>
A. Interest on the Class
A, Class M-1, Class M-2
and Class B-1
Certificates............ Interest will be payable first to each class of
Class A Certificates concurrently, then to the
Class M-1 Certificates, then to the Class M-2
Certificates, and then to the Class B-1
Certificates, to the extent of the Amount
Available. See "Description of the Certificates--
Distributions on Certificates" and "--Losses on
Liquidated Loans" for a more detailed description
of the calculation of interest payable on the
Certificates.
B. Principal on the Class
A, Class M and
Class B-1 Certificates
........................ After payment of the interest due on the
Certificates described above, the Trustee will
then apply any remaining Amount Available to pay
principal on the Class A (except the Class A-6 IO
Certificates, which will receive no principal),
Class M and Class B-1 Certificates in the amounts
and order of priority set forth below:
First, the Trustee will distribute a formula
amount dictated by the amount of principal due
(whether or not collected) on the adjustable rate
home equity loans for that payment date, to the
Class A-1A ARM and Class A-1B ARM Certificates.
Second, the Trustee will distribute a portion of
a formula amount dictated by the amount of
principal due (whether or not collected) on the
fixed-rate home equity loans for that payment
date, to the other Class A and the Class M
Certificates. These distributions will be made in
the following order:
- a specified portion of the formula principal
amount will be payable to the Class A-5
Certificates, then
- to the Class A-1 Certificates until retired,
then
- to the Class A-2 Certificates until retired,
then
- to the Class A-3 Certificates until retired,
then
- to the Class A-4 Certificates until retired,
then
- to the Class A-5 Certificates until retired,
then
- to the Class M-1 Certificates until retired,
and then
- to the Class M-2 Certificates until retired.
After paying the amounts of principal due on the
Class A and Class M Certificates described above,
the Trustee will then apply any remaining Amount
Available to pay principal on the Class B-1
Certificates until retired. Generally, the amount
of principal payable on the Class B-1
Certificates will be zero until April 2002, and
thereafter will depend on the satisfaction of
certain tests relating to the performance of the
home equity loans and the amount of principal
previously paid on the Class A and Class M
Certificates.
S-6
<PAGE>
See "Description of the Certificates--
Distributions on Certificates" for a more
detailed description of the calculation of
principal payable on the Certificates.
C. Class B-2A Interest..... After paying the amount of interest and principal
due on the Certificates described above, the
Trustee will then apply the remaining Amount
Available to pay interest on the Class B-2A
Certificates. See "Description of the
Certificates--Distributions on Certificates" for
a more detailed description of the calculation of
interest payable on the Class B-2A Certificates.
D. Class B-2A Principal.... After paying the amounts of interest and
principal due on the Certificates described
above, the Trustee will then apply the remaining
Amount Available to pay a specified portion of
the formula principal amount as principal on the
Class B-2A Certificates until retired. See "Yield
and Prepayment Considerations" and "Description
of the Certificates--Distributions on
Certificates--Class B-2A Principal" for a more
detailed description of the timing and amount of
principal distributions to be paid on the Class
B-2A Certificates.
E. Class B-2 Interest...... After paying the amounts of interest and
principal due on the Certificates described
above, the Trustee will then apply any remaining
Amount Available to pay interest on the Class B-2
Certificates. See "Description of the
Certificates--Distributions on Certificates" for
a more detailed description of the calculation of
interest payable on the Class B-2 Certificates.
F. Class B-2 Principal..... After paying the amounts of interest and
principal due on the Certificates described
above, the Trustee will then apply the remaining
Amount Available to pay a specified portion of
the formula principal amount as principal on the
Class B-2 Certificates.
G. Class B-2A Additional After paying the amounts of interest and
Principal.................. principal due on the Certificates described
above, and after paying the Monthly Servicing Fee
to the Servicer, the Trustee will apply 50% of
the remaining Amount Available, if any, to the
payment of additional principal on the Class B-2A
Certificates.
Class B-2 Limited
Guaranty................... Green Tree will guarantee payment of interest and
principal on the Class B-2 Certificates. The
Class B-2 Limited Guaranty is of no benefit to
any other class of Certificates (including the
Class B-2A Certificates) and will be an unsecured
general obligation of Green Tree unsupported by
any letter of credit or other credit enhancement.
See "Description of the Class B-2 Limited
Guaranty" for a complete description of Green
Tree's obligation under the Class B-2 Limited
Guaranty.
Capitalized Interest
Account.................... The Trustee will establish a capitalized interest
account to cover interest payments on the
Certificates on the payment dates in April, May
and June 1999 in the event that interest
S-7
<PAGE>
collections on the loans are insufficient. Any
funds remaining in the capitalized interest
account will be released to a subsidiary of Green
Tree in June 1999 (or after the pre-funding
account described below has been fully used, if
earlier).
Subordination of Class M
and Class B Certificates... The Class M and Class B-1 Certificates will be
subordinate to the Class A Certificates, meaning
that the Trustee will apply the Amount Available
to pay all interest then due on the Class A
Certificates before paying the interest then due
on the Class M and Class B-1 Certificates, and
the Trustee will likewise apply the remaining
Amount Available (after paying interest on the
Class A, Class M and Class B-1 Certificates) to
pay all principal then due on the Class A
Certificates before paying any principal on the
Class M or Class B-1 Certificates. The Class M-2
Certificates will be similarly subordinated to
the Class M-1 Certificates. In addition, the
Class B-1 Certificates are entitled to interest
only after payment of all interest then due on
the Class A and Class M Certificates and to
principal distributions only after all the Class
A and Class M Certificates are paid in full, or
if certain tests relating to the performance of
the home equity loans are met. This increases the
possibility that the Class A and Class M
Certificates would be paid in full but the Class
B-1 Certificates would not. The Class B-2A
Certificates will be subordinated to the Class A,
Class M and Class B-1 Certificates, with interest
and principal payable from the Amount Available
only after payment of all interest and principal
then due on the Class A, Class M and Class B-1
Certificates. The Class B-2 Certificates will be
similarly subordinated to the Class B-2A
Certificates. See "Description of the
Certificates-- Distributions on Certificates" for
a more detailed description of the manner and
order of priority of distributions on the
Certificates.
In addition, in the event of severe losses and
delinquencies on the home equity loans comprising
the pool, those losses will first be imposed on
the Class B-2 Certificates, then on the Class B-
2A Certificates, then on the Class B-1
Certificates, and then on the Class M-2
Certificates, and so on through classes of
increasing seniority. See "Description of the
Certificates--Losses on Liquidated Loans" for a
more detailed description of the allocation of
losses on the home equity loans.
Home Equity Loans.......... The pool will include two types of home equity
loans: fixed-rate home equity loans and
adjustable rate home equity loans. In this
summary, we sometimes refer to the home equity
loans as the "loans." References to percentages
of the loans refer to the percentage of the
aggregate principal balance of the loans as of
the Cut-off Date.
A. Fixed-Rate Home Equity
Loans................... This prospectus supplement provides information
regarding a portion of the fixed-rate home equity
loans, representing
S-8
<PAGE>
about 45.85% of all the fixed-rate home equity
loans. Green Tree will transfer another portion
of the fixed-rate home equity loans to the trust
on the closing date, and will transfer the
remaining fixed-rate home equity loans to the
trust within 90 days after the closing date.
With respect to the fixed-rate home equity loans
(as of the Cut-off Date):
- all are secured by a lien on the related
real property;
- the related properties are located in 48
states and the District of Columbia;
- there are 6,952 loans;
- the contract rates range from 4.75% to
18.95%, with a weighted average of 11.29%;
- the weighted average term to scheduled
maturity, as of their dates of origination,
was 249 months, and the weighted average
term to scheduled maturity, as of the Cut-
off Date, was 247 months;
- 23.70% are balloon loans and the rest
provide for level monthly payments for the
duration of the loan;
- the weighted average contract rate on the
balloon loans was 11.11%;
- the balloon loans had a weighted average
term to scheduled maturity, as of their
dates of origination, of 199 months, and a
weighted average to maturity as of the Cut-
off Date of 198 months; and
- the latest scheduled maturity date was in
February, 2029.
See "The Loans--Fixed-Rate Loans" for a more
detailed description of the fixed-rate home
equity loans and the permissible characteristics
of the second and third portions of the fixed-
rate home equity loans.
B. Adjustable Rate Home
Equity Loans............ This prospectus supplement provides information
regarding a portion of the adjustable rate home
equity loans, representing about 56.74% of all
the adjustable rate home equity loans. Green Tree
will transfer another portion of the adjustable
rate home equity loans to the trust on the
closing date, and will transfer the remaining
adjustable rate home equity loans to the trust
within 90 days after the closing date.
For purposes of calculating the amount of
principal payable on each payment date on the
Class A-1A ARM and Class A-1B ARM Certificates,
the adjustable rate loans have been divided into
two groups, Group I and Group II, respectively.
This prospectus supplement provides information
regarding the initial Group I adjustable rate
loans and the initial Group II adjustable rate
loans. See "The Loans--Adjustable Rate Loans" for
a more detailed description of the adjustable
rate home equity loans and the permissible
characteristics of the
S-9
<PAGE>
second and third portions of the adjustable rate
home equity loans.
1. Group I............... With respect to the Group I adjustable rate loans
(as of the Cut-off Date):
- all are secured by a lien on the related real
property;
- the related properties are located in 40
states and the District of Columbia;
- there are 786 loans;
- no loan has a principal balance at
origination of more than $240,000.00;
- each loan accrues interest at a fixed rate
for no more than 36 months, and thereafter
the interest rate adjusts semiannually to
equal the sum of the six-month LIBOR and the
gross margin specified in that loan;
- the weighted average term to scheduled
maturity, as of their dates of origination,
was 360 months, and the weighted average term
to scheduled maturity, as of the Cut-off
Date, was 358 months.
2. Group II ............. With respect to the Group II adjustable rate
loans (as of the Cut-off Date):
- all are secured by a lien on the related real
property;
- the related properties are located in 41
states and the District of Columbia;
- there are 671 loans;
- each loan accrues interest at a fixed rate
for no more than 35 months, and thereafter
the interest rate adjusts semiannually to
equal the sum of the six-month LIBOR and the
gross margin specified in that loan;
- the weighted average term to scheduled
maturity, as of their dates of origination,
was 360 months, and the weighted average term
to scheduled maturity, as of the Cut-off
Date, was 358 months.
Pre-Funding Account........ If the aggregate principal balance of the loans
transferred by Green Tree to the trust on the
closing date is less than the aggregate original
principal balance of the Certificates, that
difference (which Green Tree expects will be
approximately $300,000,000) will be deposited by
the Trustee in a pre-funding account, and those
funds will be used to purchase loans from time to
time until June 14, 1999. If those funds are not
completely used by June 14, 1999, the remaining
funds (if any) will be distributed as principal
on the Class A-1 Certificates (to the extent of
remaining funds that had been allocated for the
purchase of fixed-rate loans), and on the Class
A-1A ARM and Class A-1B ARM Certificates (to the
extent of remaining funds that had been allocated
for the purchase of adjustable rate loans) on the
June 1999 payment date.
S-10
<PAGE>
Advances................... The Servicer is obligated to make advances each
month of any scheduled payments on the loans that
were due but not received during the prior Due
Period, but it will be entitled to reimbursement
for any advance. See "Description of the
Certificates--Advances" in this prospectus
supplement and in the prospectus for a more
detailed description of the Servicer's obligation
to make advances and its right to be reimbursed
for advances.
Repurchase or Substitution
Obligations................ Green Tree will make representations and
warranties about the loans when it transfers them
to the trust. If a representation or warranty is
breached in a way that materially and adversely
affects the interests of the Certificateholders,
then Green Tree must, within 90 days, either (i)
cure the breach or (ii) repurchase the defective
loans. During the first two years after the
closing date, Green Tree may substitute other
loans instead of repurchasing defective loans.
See "Description of the Certificates--Conveyance
of Loans" in this prospectus supplement and in
the prospectus for a more complete description of
Green Tree's representations and warranties about
the loans, its repurchase obligation, and its
right to substitute loans.
Repurchase Options......... After the scheduled principal balance of the
loans is less than 10% of the scheduled principal
balance of the loans as of their applicable cut-
off dates, the servicer will have the option to
purchase all of the outstanding loans. See
"Description of the Certificates--Repurchase
Option" in this prospectus supplement and in the
prospectus for a more detailed description of the
terms of this repurchase option.
Ratings.................... The Certificates will not be issued and sold
unless Standard & Poor's Rating Services, a
division of the McGraw-Hill Companies, Inc.
("S&P") and Fitch IBCA, Inc. ("Fitch") have
assigned the ratings specified on page S-4 (or
better) to the Certificates.
The ratings on each class of Certificates by S&P
addresses the likelihood of timely receipt of
interest and ultimate receipt of principal. The
rating of each class of Certificates by Fitch
addresses the likelihood of the receipt of
Certificateholders of all distributions to which
such Certificateholders are entitled. The ratings
of S&P and Fitch do not address the likelihood of
payment of any interest carried forward and
payable to the Class A-1A ARM and Class A-1B ARM
Certificateholders on future payment dates. A
security rating is not a recommendation to buy,
sell or hold securities and may be subject to
revision or withdrawal at any time by the
assigning rating agency.
S&P assigns the additional rating of "r" to
highlight classes of securities that S&P believes
may experience high volatility or high
variability in expected returns due to non-credit
risks.
S-11
<PAGE>
The ratings of the Class B-2 Certificates are
based in part on an assessment of Green Tree's
ability to make payments under the Class B-2
Limited Guaranty. Any reduction in the rating of
Green Tree's debt securities may result in a
similar reduction in the ratings of the Class B-2
Certificates.
Green Tree has not requested a rating of the
Certificates from any rating agencies other than
S&P and Fitch. You must not assume that another
rating agency will assign a rating to any of
these Certificates, nor should you assume what
any such rating, if issued, would be.
Tax Status................. In the opinion of counsel to Green Tree, for
federal income tax purposes the trust will
consist of two segregated asset pools--the
"Master REMIC" and the "Subsidiary REMIC" and
each will be treated as a separate "real estate
mortgage investment conduit" or "REMIC." Each
class of Certificates will constitute "regular
interests" in the Master REMIC and generally will
be treated as debt instruments of the trust for
federal income tax purposes. If you purchase a
Certificate, you will be required to include as
income all interest paid on the Certificates
(including any original issue discount), in
accordance with the accrual method of accounting,
even if you usually use the cash method of
accounting. The Class A-6 IO Certificates will be
considered to have been issued with original
issue discount. See "Certain Federal Income Tax
Consequences" in this prospectus supplement and
in the prospectus for a more detailed description
of the tax status of the Certificates.
ERISA Considerations........ Subject to the conditions described under "ERISA
Considerations," employee benefit plans that are
subject to the Employee Retirement Income
Security Act of 1974, as amended, may purchase
Class A Certificates. An employee benefit plan
may not purchase any other class of Certificates,
unless it satisfies the conditions described
under "ERISA Considerations" in this prospectus
supplement and in the prospectus.
Legal Investment
Considerations.............. The Certificates will not constitute "mortgage
related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA")
because a number of the loans are not secured by
first liens on the related real estate, as
required by SMMEA. This means that many
institutions that have the legal authority to
invest in "mortgage related securities" may not
be legally authorized to invest in the
Certificates. You should consult with your own
legal advisor to decide whether and to what
extent you may legally invest in the
Certificates.
S-12
<PAGE>
RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase Certificates. There are more risk factors that are applicable to any
series of certificates like these. Those risk factors are printed in the
prospectus and you should consider those risk factors also.
Reliance on Historical Data With Respect to Home Equity Loans. If you
purchase a Certificate, the return on your investment will depend largely on
the performance of the loans constituting the underlying pool. We have
disclosed Green Tree's historical delinquency experience with home equity loans
under "The Loans" in this prospectus supplement, but the historical experience
may not be an accurate prediction of the performance of the home equity loans
constituting the pool for several reasons. First, Green Tree's historical
experience with home equity loans is limited: it began purchasing and servicing
them in January 1996. If Green Tree's historical experience were longer, or
involved a larger number of home equity loans, the data might well be
substantially different, and some investors might consider the data a better
predictor of the performance of the pool. Second, historical experience with
the performance of one pool of loans is never a completely reliable predictor
of the future performance of another pool of loans. Third, the information
incorporates some home equity loans that are not of the type to be included in
the pool, and therefore the information presented is not necessarily indicative
of Green Tree's delinquency experience with respect to home equity loans
similar to the home equity loans comprising the pool. You must not assume that
the pool will experience delinquencies identical to the historical data
presented here. Because of Green Tree's limited experience with home equity
loans, we have not included Green Tree's loan loss or liquidation experience
with home equity loans in this prospectus supplement.
Balloon Loans. A substantial number (approximately 23.70%) of the loans are
"balloon loans." These loans require equal monthly payments, consisting of
principal and interest, based on a stated amortization schedule, and a single
payment of the remaining principal balance of the loan at maturity. The
remainder of the loans require substantially equal monthly payments that are,
if timely paid, sufficient to amortize fully the principal balance of the loan
on or before its maturity date. The balloon loans may present a higher risk of
default than the fully-amortizing loans, because the balloon loan borrowers are
required to make a larger payment at maturity. If you purchase a Certificate,
the return on your investment will depend largely on the performance of the
loans constituting the pool. If a substantial number of the balloon loans
default, causing higher than expected defaults and losses on the pool, you may
suffer a loss on your investment.
Truth-in-Lending Considerations. It is likely that some loans in the pool
are subject to the Home Ownership and Equity Protection Act of 1994 (the "Home
Protection Act"). The Home Protection Act adds certain additional provisions to
Regulation Z, the implementing regulation of the Federal Truth-in-Lending Act.
These provisions impose additional disclosure and other requirements on
creditors with respect to non-purchase money mortgage loans with high interest
rates or up-front fees and charges. A violation of these provisions of the Home
Protection Act can affect the enforceability of the related loan, and it
subjects any assignee of such a loan (such as the trust) to all the claims and
defenses that the consumer could assert against the creditor, including the
right to rescind the loan. If you purchase a Certificate, the return on your
investment will depend largely on the performance of the loans constituting the
pool. If Green Tree is found to have violated provisions of the Home Protection
Act with respect to any loan that is subject to the Home Protection Act, the
trust may be unable to collect on that loan. Green Tree would, however, be
obligated to repurchase that loan because of the breach of its representation
and warranty.
Variations in Loan Characteristics. This prospectus supplement describes a
portion of the loans. The additional loans that Green Tree delivers on the
closing date and the subsequent loans that Green Tree delivers after the
closing date will have characteristics that differ somewhat from the initial
loans described in this prospectus supplement. However, each of the additional
loans and subsequent loans must satisfy the eligibility criteria described
under "Description of the Certificates--Conveyance of Loans" and "--Conveyance
of Subsequent Loans and Pre-Funding Account" in this prospectus supplement. We
will file Current Reports on Form 8-K following the purchase of additional
loans and subsequent loans by the trust and following the termination of the
funding period. The Current Report on Form 8-K will include the same type of
information regarding the subsequent loans that is included in this prospectus
supplement with respect to the initial loans.
S-13
<PAGE>
STRUCTURE OF THE TRANSACTION
On or about March 18, 1999 (the "Closing Date"), the Company will establish
the trust (the "Trust") pursuant to a Pooling and Servicing Agreement to be
dated as of February 1, 1999 (the "Agreement"), between the Company, as Seller
and Servicer, and the Trustee.
The Class A-1A ARM, Class A-1B ARM, Class A-1, Class A-2, Class A-3, Class A-
4, Class A-5, Class A-6 IO, Class M-1, Class M-2, Class B-1, Class B-2A and
Class B-2 Certificates (the "Certificates") will be issued by the Trust, the
corpus of which will consist primarily of a pool (the "Loan Pool") comprised of
closed-end home equity loans (the "Loans"), including all rights to receive
payments due on such Loans after (i) January 31, 1999 (or the date of
origination thereof, if later) for each Loan other than those Loans that are
purchased by the Trust between the Closing Date and June 14, 1999 (the
"Subsequent Loans") and (ii) for each Subsequent Loan, the date on which such
Loan is purchased by the Trust (in each case, the "Cut-off Date"), liens on the
related real estate and amounts held for the Trust in the Certificate Account
(as defined below). The Trust will also issue several other classes of more
subordinated certificates, which are described in "Description of the
Certificates" but are not being offered hereby.
Payments and recoveries in respect of principal and interest on the Loans
will be paid into a separate trust account maintained at an Eligible
Institution (initially U.S. Bank National Association, Minneapolis, Minnesota)
in the name of the Trust (the "Certificate Account"), no later than one
business day after receipt. Payments on deposit in the Certificate Account and
constituting the Amount Available will be applied on the fifteenth day of each
month (or, if such day is not a business day, the next succeeding business day)
(each, a "Payment Date") to make the distributions to the Certificateholders as
of the immediately preceding Record Date as described under "Description of the
Certificates--Distributions on Certificates" herein and to pay certain monthly
fees to the Servicer as compensation for its servicing of the Loans (the
"Monthly Servicing Fee").
The Servicer will be obligated to advance for each Payment Date any scheduled
payments ("Advances") on the Loans that were due but not received during the
calendar month preceding the month in which the Payment Date occurs (the "Due
Period"). The Servicer will be entitled to reimbursement of an Advance from
funds available therefor in the Certificate Account. The Servicer will not be
required to make any Advance to the extent that it does not expect to recoup
the Advance from subsequent funds available therefor in the Certificate
Account. If the Servicer fails to make any Advance required under the
Agreement, the Trustee is obligated (subject to certain conditions) to make
such Advance.
Following the transfer of the Loans from the Company to the Trust, the
obligations of the Company are limited to (a) its obligations as Servicer to
service the Loans, (b) certain representations and warranties in the Agreement
as described under "Description of the Certificates--Conveyance of Loans"
herein and (c) certain indemnities. The Company is obligated under the
Agreement to repurchase at the Repurchase Price, or, at its option, to
substitute another loan for, any Loan on the first Payment Date which is more
than 90 days after the Company becomes aware, or the Company receives written
notice from the Trustee, of any breach of any such representation and warranty
in the Agreement that materially and adversely affects the Certificateholders'
interest in such Loan if such breach has not been cured prior to such date. The
Agreement also provides that the Company has certain obligations to repurchase
Loans and to indemnify the Trustee and Certificateholders with respect to
certain other matters.
USE OF PROCEEDS
The Company will use the net proceeds received from the sale of the
Certificates for working capital and general corporate purposes, including
building a portfolio of home equity loans, providing warehouse financing for
the purchase of loans and other costs of maintaining such loans until they are
pooled and sold to other investors.
S-14
<PAGE>
THE LOANS
Fixed-Rate Loans
The Loan Pool includes Fixed-Rate Loans (meaning all Loans other than the
Adjustable Rate Loans, described separately below). This Prospectus Supplement
contains information regarding the initial Fixed-Rate Loans, which will
represent approximately 45.85% of all Fixed-Rate Loans (the "Initial Fixed-Rate
Loans"), and which consist of closed-end home equity loans originated through
January 31, 1999. The information for each Initial Fixed-Rate Loan is as of the
Cut-off Date for such Loan. Under the Agreement, the Trust may purchase
additional Fixed-Rate Loans (the "Additional Fixed-Rate Loans") on the Closing
Date and may purchase Subsequent Fixed-Rate Loans until June 14, 1999. See
"Description of the Certificates--Conveyance of Subsequent Loans and Pre-
Funding Account" below.
The Initial Fixed-Rate Loans have an aggregate principal balance of
$412,624,098.32. Each Fixed-Rate Loan is a closed-end home equity loan
originated by the Company or by a Company-approved correspondent lender and
purchased by the Company. Each Fixed-Rate Loan is secured by a lien on the
related real estate.
The Company will make certain representations and warranties in the
Agreement, including that (a) each Fixed-Rate Loan is fully amortizing and
provides for level monthly payments over the term of such loan, computed on the
simple interest method (except for Loans that provide for the payment of the
unamortized principal balance of the Loan in a single payment at the maturity
of the Loan that is greater than the preceding monthly payment (the "Balloon
Loans") and the step-up rate Loans), (b) each Initial Fixed-Rate Loan has its
last scheduled payment due no later than February 6, 2029, and (c) each Fixed-
Rate Loan is secured by a lien on the related real estate. The Fixed-Rate Loans
will be originated or acquired by the Company in the ordinary course of the
Company's business. A detailed listing of the Initial Fixed-Rate Loans is
appended to the Agreement. See "Description of the Certificates" herein and in
the Prospectus. Each of the Initial Fixed-Rate Loans has an annual rate of
interest (the "Loan Rate") of at least 4.75% and not more than 18.95% and the
weighted average of the Loan Rates of the Initial Fixed-Rate Loans as of the
Cut-off Date is 11.29%. As of the Cut-off Date, the Initial Fixed-Rate Loans
had remaining maturities of at least 26 months but not more than 360 months and
original maturities of at least 36 months but not more than 360 months. The
Initial Fixed-Rate Loans had a weighted average term to scheduled maturity, as
of origination, of 249 months, and a weighted average term to scheduled
maturity, as of the Cut-off Date, of 247 months. The average principal balance
per Initial Fixed-Rate Loan as of the Cut-off Date was $59,353.29 and the
principal balances on the Initial Fixed-Rate Loans as of the Cut-off Date
ranged from $7,676.17 to $425,000.00. The Balloon Loans included in the Initial
Fixed-Rate Loans consisted of 1,164 closed-end home equity loans and have a
principal balance as of the Cut-off Date of $97,785,147.51. The weighted
average of the Loan Rates of such Balloon Loans as of the Cut-off Date was
11.11%, and such Balloon Loans had a weighted average term to scheduled
maturity, as of origination, of 199 months, and a weighted average term to
scheduled maturity, as of the Cut-off Date, of 198 months. The Initial Fixed-
Rate Loans arise from loans relating to real property located in 48 states and
the District of Columbia. By principal balance as of the Cut-off Date,
approximately 9.44% of the Initial Fixed-Rate Loans were secured by real
property located in California, 6.36% in Ohio, 5.60% in Michigan and 5.34% in
North Carolina. No other state represented 5.00% or more of the aggregate of
the Cut-off Date principal balances of all the Loans as of their applicable
Cut-off Date (the "Cut-off Date Pool Principal Balance") of the Initial Fixed-
Rate Loans.
S-15
<PAGE>
Set forth below is a description of certain additional characteristics of the
Initial Fixed-Rate Loans. Percentages in these tables may not add up to 100.00%
due to rounding.
Geographical Distribution of Mortgaged Properties--Initial Fixed-Rate Loans
<TABLE>
<CAPTION>
% of Initial % of Initial
Fixed-Rate Loans Fixed-Rate Loans
Number of by Number of Aggregate Principal by Outstanding
Loans as of Loans as Balance Outstanding Principal Balance
State Cut-off Date of Cut-off Date as of Cut-off Date as of Cut-off Date
- ----- ------------ ----------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Alabama................. 265 3.81% $ 13,321,819.04 3.23%
Arizona................. 145 2.09 9,162,746.42 2.22
Arkansas................ 57 0.82 3,493,734.05 0.85
California.............. 489 7.03 38,955,418.32 9.44
Colorado................ 141 2.03 9,429,898.34 2.29
Connecticut............. 62 0.89 4,529,426.91 1.10
Delaware................ 30 0.43 2,044,010.37 0.50
District of Columbia.... 6 0.09 223,019.61 0.05
Florida................. 266 3.83 13,982,927.57 3.39
Georgia................. 238 3.42 14,339,935.91 3.48
Idaho................... 27 0.39 1,229,170.64 0.30
Illinois................ 320 4.60 19,343,603.66 4.69
Indiana................. 247 3.55 12,659,964.13 3.07
Iowa.................... 143 2.06 7,938,645.56 1.92
Kansas.................. 103 1.48 5,182,046.37 1.26
Kentucky................ 148 2.13 7,934,565.96 1.92
Louisiana............... 194 2.79 10,237,474.86 2.48
Maine................... 6 0.09 399,339.13 0.10
Maryland................ 159 2.29 7,957,416.78 1.93
Massachusetts........... 76 1.09 5,709,402.54 1.38
Michigan................ 352 5.06 23,101,361.11 5.60
Minnesota............... 112 1.61 7,225,069.17 1.75
Mississippi............. 90 1.29 4,484,847.46 1.09
Missouri................ 178 2.56 10,135,209.67 2.46
Montana................. 21 0.30 1,260,601.01 0.31
Nebraska................ 57 0.82 3,210,895.14 0.78
Nevada.................. 76 1.09 4,524,285.91 1.10
New Hampshire........... 11 0.16 498,440.53 0.12
New Jersey.............. 113 1.63 6,018,503.58 1.46
New Mexico.............. 46 0.66 3,572,735.00 0.87
New York................ 228 3.28 15,165,947.11 3.68
North Carolina.......... 367 5.28 22,036,116.35 5.34
North Dakota............ 16 0.23 938,715.44 0.23
Ohio.................... 460 6.62 26,230,637.01 6.36
Oklahoma................ 62 0.89 3,460,740.17 0.84
Oregon.................. 63 0.91 3,506,715.10 0.85
Pennsylvania............ 306 4.40 17,702,817.13 4.29
Rhode Island............ 25 0.36 1,554,117.50 0.38
South Carolina.......... 164 2.36 9,332,835.47 2.26
South Dakota............ 19 0.27 1,082,350.63 0.26
Tennessee............... 146 2.10 7,611,474.09 1.84
Texas................... 302 4.34 13,598,065.02 3.30
Utah.................... 61 0.88 3,013,823.43 0.73
Vermont................. 3 0.04 57,811.87 0.01
Virginia................ 157 2.26 10,251,190.10 2.48
Washington.............. 146 2.10 9,984,873.81 2.42
West Virginia........... 51 0.73 2,629,192.34 0.64
Wisconsin............... 156 2.24 10,020,484.13 2.43
Wyoming................. 42 0.60 2,339,676.87 0.57
----- ------ --------------- ------
Total............... 6,952 100.00% $412,624,098.32 100.00%
===== ====== =============== ======
</TABLE>
S-16
<PAGE>
Years of Origination--Initial Fixed-Rate Loans
<TABLE>
<CAPTION>
% of Initial Fixed-
Rate Loans by
Aggregate Principal Outstanding Principal
Number of Loans Balance Outstanding Balance as of
Year of Origination as of Cut-off Date as of Cut-off Date Cut-off Date
- ------------------- ------------------ ------------------- ---------------------
<S> <C> <C> <C>
1995.................... 10 $ 255,718.71 0.06%
1996.................... 221 5,720,425.92 1.39
1997.................... 44 1,880,130.68 0.46
1998.................... 4,730 279,110,790.75 67.64
1999.................... 1,947 125,657,032.26 30.45
----- --------------- ------
Total............... 6,952 $412,624,098.32 100.00%
===== =============== ======
</TABLE>
Distribution of Original Loan Amounts--Initial Fixed-Rate Loans
<TABLE>
<CAPTION>
% of Initial Fixed-
Rate Loans by
Aggregate Principal Outstanding Principal
Number of Loans Balance Outstanding Balance as of
Original Loan Amount as of Cut-off Date as of Cut-off Date Cut-off Date
-------------------- ------------------ ------------------- ---------------------
<S> <C> <C> <C>
Less than $10,000.00.... 12 $ 105,780.54 0.03%
$ 10,000.00 to
$ 19,999.99............ 1,016 14,768,686.17 3.58
$ 20,000.00 to
$ 29,999.99............ 1,039 25,052,426.92 6.07
$ 30,000.00 to
$ 39,999.99............ 773 26,481,895.46 6.42
$ 40,000.00 to
$ 49,999.99............ 755 33,517,441.06 8.12
$ 50,000.00 to
$ 59,999.99............ 622 33,903,762.06 8.22
$ 60,000.00 to
$ 69,999.99............ 590 38,021,095.52 9.21
$ 70,000.00 to
$ 79,999.99............ 495 36,806,563.44 8.92
$ 80,000.00 to
$ 89,999.99............ 329 27,685,707.61 6.71
$ 90,000.00 to
$ 99,999.99............ 255 24,108,152.10 5.84
$100,000.00 to
$109,999.99............ 221 23,157,686.75 5.61
$110,000.00 to
$119,999.99............ 158 18,147,369.88 4.40
$120,000.00 to
$129,999.99............ 143 17,806,373.33 4.32
$130,000.00 to
$139,999.99............ 124 16,681,469.19 4.04
$140,000.00 to
$149,999.99............ 94 13,630,362.48 3.30
$150,000.00 to
$159,999.99............ 78 11,975,493.27 2.90
$160,000.00 to
$169,999.99............ 54 8,921,514.08 2.16
$170,000.00 to
$179,999.99............ 33 5,737,366.86 1.39
$180,000.00 to
$189,999.99............ 34 6,250,565.23 1.51
$190,000.00 to
$199,999.99............ 25 4,870,898.22 1.18
$200,000.00 to
$209,999.99............ 21 4,302,150.61 1.04
$210,000.00 to
$219,999.99............ 18 3,872,340.44 0.94
Greater than
$219,999.99............ 63 16,818,997.10 4.08
----- --------------- ------
Total............... 6,952 $412,624,098.32 100.00%
===== =============== ======
</TABLE>
S-17
<PAGE>
Loan Rates--Initial Fixed-Rate Loans
<TABLE>
<CAPTION>
% of Initial Fixed-Rate
Loans by
Aggregate Principal Outstanding Principal
Number of Loans Balance Outstanding Balance as of
Loan Rate as of Cut-off Date as of Cut-off Date Cut-off Date
- --------- ------------------ ------------------- -----------------------
<S> <C> <C> <C>
Less than 7.01%......... 5 $ 388,359.55 0.09%
7.01 to 8.00%......... 34 3,550,114.98 0.86
8.01 to 9.00%......... 189 19,075,206.88 4.62
9.01 to 10.00%......... 741 71,350,667.75 17.29
10.01 to 11.00%......... 1,565 128,021,412.78 31.03
11.01 to 12.00%......... 1,256 75,325,698.90 18.26
12.01 to 13.00%......... 1,239 53,150,088.11 12.88
13.01 to 14.00%......... 1,238 40,787,563.76 9.88
14.01 to 15.00%......... 439 14,007,750.32 3.39
15.01 to 16.00%......... 129 3,688,255.82 0.89
16.01 to 17.00%......... 79 2,223,722.48 0.54
Greater than 17.00%..... 38 1,055,256.99 0.26
----- --------------- ------
Total............... 6,952 $412,624,098.32 100.00%
===== =============== ======
</TABLE>
Remaining Months to Maturity--Initial Fixed-Rate Loans
<TABLE>
<CAPTION>
% of Initial Fixed-Rate
Loans by
Months Remaining to Aggregate Principal Outstanding Principal
Scheduled Maturity Number of Loans Balance Outstanding Balance as of
As of Cut-off Date as of Cut-off Date as of Cut-off Date Cut-off Date
------------------- ------------------ ------------------- -----------------------
<S> <C> <C> <C>
Fewer than 31........... 1 $ 8,304.39 *
31 to 60.............. 77 1,494,658.41 0.36%
61 to 90.............. 79 2,248,021.69 0.54
91 to 120.............. 419 12,489,424.86 3.03
121 to 150.............. 93 3,028,740.47 0.73
151 to 180.............. 2,485 125,184,848.48 30.34
181 to 210.............. 15 694,407.21 0.17
211 to 240.............. 2,002 122,533,950.88 29.70
241 to 270.............. 5 343,935.07 0.08
271 to 300.............. 917 63,986,607.11 15.51
301 to 330.............. 2 81,724.31 0.02
331 to 360.............. 857 80,529,475.44 19.52
----- --------------- ------
Total............... 6,952 $412,624,098.32 100.00%
===== =============== ======
</TABLE>
- --------
* Indicates an amount greater than zero but less than 0.005% of the aggregate
principal balance of the Initial Fixed-Rate Loans.
S-18
<PAGE>
Lien Position--Initial Fixed-Rate Loans
<TABLE>
<CAPTION>
% of Initial Fixed-Rate
Loans by
Aggregate Principal Outstanding Principal
Number of Loans Balance Outstanding Balance as of
Lien Position as of Cut-off Date as of Cut-off Date Cut-off Date
- ------------- ------------------ ------------------- -----------------------
<S> <C> <C> <C>
First........... 4,204 $333,357,782.59 80.79%
Second.......... 2,735 78,890,178.20 19.12
Third........... 13 376,137.53 0.09
----- --------------- ------
Total....... 6,952 $412,624,098.32 100.00%
===== =============== ======
</TABLE>
Combined Loan-to-Value Ratio--Initial Fixed-Rate Loans
<TABLE>
<CAPTION>
% of Initial Fixed-Rate
Loans by
Aggregate Principal Outstanding Principal
Number of Loans Balance Outstanding Balance as of
Combined Loan-to-Value Ratio as of Cut-off Date as of Cut-off Date Cut-off Date
- ---------------------------- ------------------ ------------------- -----------------------
<S> <C> <C> <C>
Less than 10.01%............ 1 $ 28,000.00 0.01%
10.01 to 20.00%............. 19 314,216.63 0.08
20.01 to 30.00%............. 37 877,187.88 0.21
30.01 to 40.00%............. 39 1,347,611.69 0.33
40.01 to 50.00%............. 77 2,878,872.96 0.70
50.01 to 60.00%............. 124 4,867,038.02 1.18
60.01 to 70.00%............. 244 12,106,280.40 2.93
70.01 to 80.00%............. 847 47,108,949.91 11.42
80.01 to 90.00%............. 2,160 129,600,247.81 31.41
Greater than 90.00%......... 3,404 213,495,693.02 51.74
----- --------------- ------
Total................... 6,952 $412,624,098.32 100.00%
===== =============== ======
</TABLE>
The original combined loan-to-value ratio ("CLTV") of each Loan shown in the
table above is equal to (i) the sum of (a) the original principal balance of
such Loan plus (b) the outstanding principal balance (as of the date of
origination of the Loan) of any loan secured by a prior lien on the same
property, divided by (ii) the Collateral Value of the related property. The
"Collateral Value" of the property securing a Loan is the lesser of (x) the
appraised value based on an appraisal made for the originator of the Loan by an
independent fee appraiser (or, in certain instances, by an employee of the
Company who is a licensed appraiser) at the time of origination of the Loan,
and (y) the sales price of the property at the time of origination of the Loan.
With respect to a Loan the proceeds of which were used to refinance an existing
mortgage loan, the Collateral Value is the appraised value of the related
property based upon the appraisal obtained at the time of refinancing.
Adjustable Rate Loans
The Loan Pool includes Adjustable Rate Loans. This Prospectus Supplement
contains information regarding the initial Adjustable Rate Loans (the "Initial
Adjustable Rate Loans"), which will represent approximately 56.74% of all
Adjustable Rate Loans, and which consist of closed-end loans originated through
January 31, 1999. The information for each Initial Adjustable Rate Loan is as
of the Cut-off Date for such Loan. Under the Agreement, the Trust may purchase
additional Adjustable Rate Loans (the "Additional Adjustable Rate Loans") on
the Closing Date and may purchase Subsequent Adjustable Rate Loans until June
14, 1999. See "Description of the Certificates--Conveyance of Subsequent Loans
and Pre-Funding Account" below.
Each Adjustable Rate Loan is a closed-end loan originated by the Company or
by a Company-approved correspondent lender and purchased by the Company. Each
Adjustable Rate Loan is secured by a lien on the related real estate.
S-19
<PAGE>
The Initial Adjustable Rate Loans have Loan Rates subject to semiannual
adjustment after an initial period of up to 36 months on the day of the month
specified in the Adjustable Rate Loan (each such date, an "Adjustment Date"),
to equal the sum of (i) the Six-Month LIBOR Index (as defined below) and (ii) a
fixed percentage amount specified in the related Adjustable Rate Loan (the
"Gross Margin"). The Loan Rates will not increase on any Adjustment Date by
more than 3% per annum. All of the Initial Adjustable Rate Loans further
provide that the Loan Rate will in no event be more than the fixed percentage
set forth in the Adjustable Rate Loan (such rate, the "Maximum Loan Rate").
Each Initial Adjustable Rate Loan provides that in no event will the Loan Rate
be less than a specified lifetime interest rate floor (such rate, the "Minimum
Loan Rate"). Effective with the first payment due on an Initial Adjustable Rate
Loan after each related Adjustment Date, the monthly payment will be adjusted
to an amount which will fully amortize the outstanding principal balance of
such Adjustable Rate Loan over its remaining term, and pay interest at the Loan
Rate as so adjusted. All of the Initial Adjustable Rate Loans were originated
with a Loan Rate less than the sum of (i) the Six-Month LIBOR Index at the time
the initial Loan Rate was established and (ii) the Gross Margin. The "Six-Month
LIBOR Index" is a per annum rate equal to the average of interbank offered
rates for six-month U.S. dollar-denominated deposits in the London market based
on quotations of major banks, as published in The Wall Street Journal and as
most recently available as of the date specified in the related Adjustable Rate
Loan.
The Company will make certain representations and warranties in the
Agreement, including that (a) each Adjustable Rate Loan is fully amortizing and
provides for monthly payments, except, in the case of a Balloon Loan, for the
final monthly payment, over the term of such loan, computed on the simple
interest method, (b) each Adjustable Rate Loan has its last scheduled payment
due no later than February 2029, and (c) each Adjustable Rate Loan is secured
by a lien on the related real estate. The Adjustable Rate Loans will be
originated or acquired by the Company in the ordinary course of the Company's
business. A detailed listing of the Adjustable Rate Loans will be appended to
the Agreement. See "Description of the Certificates" herein and in the
Prospectus.
For purposes of calculating the amount of principal payable on each Payment
Date on the Class A-1A ARM and Class A-1B ARM Certificates, the Adjustable Rate
Loans have been divided into two groups, Group I and Group II. This Prospectus
Supplement provides information regarding the Initial Group I Adjustable Rate
Loans and the Initial Group II Adjustable Rate Loans.
Group I Adjustable Rate Loans
As of the Cut-off Date, the Initial Group I Adjustable Rate Loans had Loan
Rates ranging from 5.63% to 13.25% and a weighted average Loan Rate of 9.44%.
As of the Cut-off Date, the weighted average Maximum Loan Rate of the Initial
Group I Adjustable Rate Loans was 15.55%, with Maximum Loan Rates that range
from 9.60% to 25.40%. As of the Cut-Off Date, the Initial Group I Adjustable
Rate Loans had a weighted average gross margin of 6.68% and gross margins
ranging from 4.25% to 10.00%. As of the Cut-off Date, the Initial Group I
Adjustable Rate Loans had remaining maturities of at least 342 months but not
more than 360 months and original maturities of at least 360 months but not
more than 360 months. The Initial Group I Adjustable Rate Loans had a weighted
average term to scheduled maturity, as of origination, of 360 months, and a
weighted average term to scheduled maturity, as of the Cut-off Date, of 358
months. The average principal balance per Initial Group I Adjustable Rate Loan
as of the Cut-off Date was $108,252.73 and the principal balances on the
Initial Group I Adjustable Rate Loans as of the Cut-off Date ranged from
$25,000.00 to $237,022.63. The Initial Group I Adjustable Rate Loans arise from
loans relating to real property located in 40 states and the District of
Columbia. By principal balance as of the Cut-off Date, approximately 12.17% of
the Initial Group I Adjustable Rate Loans were secured by real property located
in California, 5.88% in Colorado, 5.66% in Washington, 5.24% in Maryland, 5.18%
in Florida and 5.15% in Texas. No other state represented 5.00% or more of the
aggregate Cut-off Date Principal Balance of the Initial Group I Adjustable Rate
Loans.
S-20
<PAGE>
Set forth below is a description of certain additional characteristics of the
Initial Group I Adjustable Rate Loans. Percentages in these tables may not add
up to 100.00% due to rounding.
Geographical Distribution of Mortgaged Properties--Initial Group I Adjustable
Rate Loans
<TABLE>
<CAPTION>
% of Initial
% of Initial Group I
Group I Adjustable
Adjustable Rate Loans
Rate Loans Aggregate Principal by Outstanding
by Number of Balance Principal
Number of Loans Loans as Outstanding as of Balance as of
State as of Cut-off Date of Cut-off Date Cut-off Date Cut-off Date
- ----- ------------------ --------------- ------------------- --------------
<S> <C> <C> <C> <C>
Alabama................. 21 2.67% $ 1,654,983.24 1.95%
Arizona................. 14 1.78 1,352,825.92 1.59
California.............. 71 9.03 10,352,181.00 12.17
Colorado................ 42 5.34 5,000,044.10 5.88
Delaware................ 1 0.13 61,338.05 0.07
District Of Columbia.... 5 0.64 579,883.28 0.68
Florida................. 47 5.98 4,404,702.41 5.18
Georgia................. 35 4.45 3,772,980.02 4.43
Idaho................... 8 1.02 717,377.13 0.84
Illinois................ 13 1.65 1,584,663.89 1.86
Indiana................. 39 4.96 3,481,026.74 4.09
Iowa.................... 1 0.13 67,411.23 0.08
Kansas.................. 5 0.64 480,871.32 0.57
Kentucky................ 13 1.65 1,089,660.59 1.28
Louisiana............... 16 2.04 1,662,415.80 1.95
Maryland................ 31 3.94 4,462,621.89 5.24
Massachusetts........... 14 1.78 1,721,308.75 2.02
Michigan................ 24 3.05 2,604,010.28 3.06
Minnesota............... 3 0.38 317,830.57 0.37
Mississippi............. 5 0.64 444,419.06 0.52
Missouri................ 8 1.02 997,378.61 1.17
Nebraska................ 1 0.13 67,880.72 0.08
Nevada.................. 7 0.89 931,986.77 1.10
New Hampshire........... 4 0.51 384,652.39 0.45
New York................ 5 0.64 538,432.46 0.63
North Carolina.......... 40 5.09 3,909,669.34 4.59
North Dakota............ 1 0.13 48,475.58 0.06
Ohio.................... 78 9.92 6,764,090.65 7.95
Oklahoma................ 3 0.38 216,355.13 0.25
Oregon.................. 22 2.80 2,610,265.70 3.07
Pennsylvania............ 18 2.29 1,782,440.66 2.09
Rhode Island............ 3 0.38 237,979.67 0.28
South Carolina.......... 17 2.16 1,468,426.12 1.73
Tennessee............... 24 3.05 2,235,563.12 2.63
Texas................... 40 5.09 4,378,747.62 5.15
Utah.................... 30 3.82 3,660,776.40 4.30
Vermont................. 2 0.25 123,911.81 0.15
Virginia................ 22 2.80 2,968,724.79 3.49
Washington.............. 39 4.96 4,816,663.48 5.66
West Virginia........... 1 0.13 71,262.26 0.08
Wisconsin............... 13 1.65 1,060,407.75 1.25
--- ------ -------------- ------
Total............... 786 100.00% $85,086,646.30 100.00%
=== ====== ============== ======
</TABLE>
S-21
<PAGE>
Years of Origination--Initial Group I Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group I
Adjustable Rate
Loans by
Aggregate Principal Outstanding Principal
Number of Loans Balance Outstanding Balance as of
Year of Origination as of Cut-off Date as of Cut-off Date Cut-off Date
- ------------------- ------------------ ------------------- ---------------------
<S> <C> <C> <C>
1997.................... 1 $ 107,916.08 0.13%
1998.................... 760 82,301,508.82 96.73
1999.................... 25 2,677,221.40 3.15
--- -------------- ------
Total............... 786 $85,086,646.30 100.00%
=== ============== ======
</TABLE>
Distribution of Original Loan Amounts--Initial Group I Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial
Group I Adjustable
Rate
Loans by
Aggregate Principal Outstanding Principal
Number of Loans Balance Outstanding Balance as of
Original Loan Amount as of Cut-off Date as of Cut-off Date Cut-off Date
-------------------- ------------------ ------------------- ---------------------
<S> <C> <C> <C>
Less than$ 30,000.00.... 1 $ 25,000.00 0.03%
$ 30,000.00 to
$ 39,999.99............ 12 432,256.15 0.51
$ 40,000.00 to
$ 49,999.99............ 39 1,773,312.68 2.08
$ 50,000.00 to
$ 59,999.99............ 55 2,998,150.85 3.52
$ 60,000.00 to
$ 69,999.99............ 83 5,352,132.97 6.29
$ 70,000.00 to
$ 79,999.99............ 69 5,149,007.74 6.05
$ 80,000.00 to
$ 89,999.99............ 55 4,663,851.39 5.48
$ 90,000.00 to
$ 99,999.99............ 70 6,640,255.04 7.80
$100,000.00 to
$109,999.99............ 63 6,549,800.73 7.70
$110,000.00 to
$119,999.99............ 61 7,037,063.79 8.27
$120,000.00 to
$129,999.99............ 55 6,863,006.09 8.07
$130,000.00 to
$139,999.99............ 38 5,134,894.39 6.03
$140,000.00 to
$149,999.99............ 36 5,220,875.75 6.14
$150,000.00 to
$159,999.99............ 29 4,484,150.97 5.27
$160,000.00 to
$169,999.99............ 33 5,402,970.04 6.35
$170,000.00 to
$179,999.99............ 21 3,675,372.52 4.32
$180,000.00 to
$189,999.99............ 10 1,836,565.05 2.16
$190,000.00 to
$199,999.99............ 15 2,918,871.97 3.43
$200,000.00 to
$209,999.99............ 11 2,249,847.76 2.64
$210,000.00 to
$219,999.99............ 11 2,357,806.90 2.77
Greater than
$219,999.99............ 19 4,321,453.52 5.08
--- -------------- ------
Total............... 786 $85,086,646.30 100.00%
=== ============== ======
</TABLE>
S-22
<PAGE>
Current Loan Rates--Initial Group I Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group I
Aggregate Principal Adjustable Rate Loans by
Number of Loans Balance Outstanding Outstanding Principal
Loan Rate as of Cut-off Date as of Cut-off Date Balance as of Cut-off Date
- --------- ------------------ ------------------- --------------------------
<S> <C> <C> <C>
Less than 7.01%......... 2 $ 179,206.68 0.21%
7.01 to 8.00%.......... 43 6,193,628.16 7.28
8.01 to 9.00%.......... 229 26,830,236.86 31.53
9.01 to 10.00%......... 304 32,074,471.52 37.70
10.01 to 11.00%......... 167 16,381,944.69 19.25
11.01 to 12.00%......... 37 3,113,835.10 3.66
12.01 to 13.00%......... 2 178,157.20 0.21
Greater than 13.00%..... 2 135,166.09 0.16
--- -------------- ------
Total............... 786 $85,086,646.30 100.00%
=== ============== ======
</TABLE>
Remaining Months to Maturity--Initial Group I Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group I
Months Remaining to Aggregate Principal Adjustable Rate Loans by
Scheduled Maturity Number of Loans Balance Outstanding Outstanding Principal
As of Cut-off Date as of Cut-off Date as of Cut-off Date Balance as of Cut-off Date
------------------- ------------------ ------------------- --------------------------
<S> <C> <C> <C>
331 to 360.............. 786 $85,086,646.30 100.00%
--- -------------- ------
Total............... 786 $85,086,646.30 100.00%
=== ============== ======
</TABLE>
Lien Position--Initial Group I Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group I
Aggregate Principal Adjustable Rate Loans by
Number of Loans Balance Outstanding Outstanding Principal
Lien Position as of Cut-off Date as of Cut-off Date Balance as of Cut-off Date
- ------------- ------------------ ------------------- --------------------------
<S> <C> <C> <C>
First........ 786 $85,086,646.30 100.00%
--- -------------- ------
Total.... 786 $85,086,646.30 100.00%
=== ============== ======
</TABLE>
Loan-to-Value Ratio--Initial Group I Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group I
Aggregate Principal Adjustable Rate Loans by
Number of Loans Balance Outstanding Outstanding Principal
Loan-to-Value Ratio as of Cut-off Date as of Cut-off Date Balance as of Cut-off Date
- ------------------- ------------------ ------------------- --------------------------
<S> <C> <C> <C>
20.01 to 30.00%......... 1 $ 49,915.34 0.06%
30.01 to 40.00%......... 1 100,000.00 0.12
40.01 to 50.00%......... 6 441,552.11 0.52
50.01 to 60.00%......... 12 947,714.22 1.11
60.01 to 70.00%......... 32 3,016,280.10 3.54
70.01 to 80.00%......... 187 20,504,844.96 24.10
80.01 to 90.00%......... 376 39,759,093.52 46.73
Greater than 90.00%..... 171 20,267,246.05 23.82
--- -------------- ------
Total............... 786 $85,086,646.30 100.00%
=== ============== ======
</TABLE>
S-23
<PAGE>
Month of Next Rate Adjustment--Initial Group I Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group I
Aggregate Principal Adjustable Rate Loans
Number of Loans Balance Outstanding by Outstanding Principal
Month of Next Rate Adjustment as of Cut-off Date as of Cut-off Date Balance as of Cut-off Date
- ----------------------------- ------------------ ------------------- --------------------------
<S> <C> <C> <C>
February 1999............... 1 $ 70,270.46 0.08%
March 1999.................. 1 157,779.46 0.19
April 1999.................. 1 81,829.14 0.10
May 1999.................... 1 138,845.73 0.16
June 1999................... 3 247,516.08 0.29
January 2000................ 1 89,051.23 0.10
February 2000............... 1 112,458.36 0.13
March 2000.................. 2 317,022.67 0.37
April 2000.................. 3 250,980.78 0.29
May 2000.................... 2 285,700.61 0.34
June 2000................... 10 1,284,061.38 1.51
July 2000................... 20 1,975,538.10 2.32
August 2000................. 50 5,112,808.60 6.01
September 2000.............. 120 13,225,940.52 15.54
October 2000................ 175 18,390,721.96 21.61
November 2000............... 210 24,196,346.61 28.44
December 2000............... 125 13,170,059.18 15.48
January 2001................ 32 3,414,575.00 4.01
February 2001............... 1 37,498.58 0.04
June 2001................... 1 222,679.25 0.26
July 2001................... 1 59,284.18 0.07
August 2001................. 3 316,056.77 0.37
September 2001.............. 4 328,855.53 0.39
October 2001................ 8 698,520.77 0.82
November 2001............... 5 333,894.00 0.39
December 2001............... 4 500,351.35 0.59
January 2002................ 1 68,000.00 0.08
--- -------------- ------
Total................... 786 $85,086,646.30 100.00%
=== ============== ======
</TABLE>
S-24
<PAGE>
Distribution of Gross Margin--Initial Group I Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group I
Aggregate Principal Adjustable Rate Loans
Number of Loans Balance Outstanding by Outstanding Principal
Gross Margin as of Cut-off Date as of Cut-off Date Balance as of Cut-off Date
- ------------ ------------------ ------------------- --------------------------
<S> <C> <C> <C>
Less than 4.500%........ 2 $ 270,628.96 0.32%
4.500 to 4.749%......... 1 39,600.00 0.05
4.750 to 4.999%......... 4 450,307.97 0.53
5.000 to 5.249%......... 5 440,410.88 0.52
5.250 to 5.499%......... 17 1,865,500.33 2.19
5.500 to 5.749%......... 28 3,182,327.30 3.74
5.750 to 5.999%......... 88 9,959,857.98 11.71
6.000 to 6.249%......... 85 9,949,978.55 11.69
6.250 to 6.499%......... 90 9,854,772.36 11.58
6.500 to 6.749%......... 94 11,055,247.74 12.99
6.750 to 6.999%......... 113 13,266,022.18 15.59
7.000 to 7.249%......... 77 7,333,942.92 8.62
7.250 to 7.499%......... 30 3,171,535.13 3.73
7.500 to 7.749%......... 23 2,372,568.94 2.79
7.750 to 7.999%......... 43 4,332,296.58 5.09
8.000 to 8.249%......... 34 3,211,422.08 3.77
8.250 to 8.499%......... 16 1,459,793.23 1.72
8.500 to 8.749%......... 22 1,673,383.09 1.97
8.750 to 8.999%......... 1 73,741.08 0.09
9.000 to 9.249%......... 7 700,746.50 0.82
9.250 to 9.499%......... 2 134,107.20 0.16
9.500 to 9.749%......... 2 122,724.71 0.14
Greater than 9.749%..... 2 165,730.59 0.19
--- -------------- ------
Total............... 786 $85,086,646.30 100.00%
=== ============== ======
</TABLE>
S-25
<PAGE>
Maximum Loan Rates--Initial Group I Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group I
Adjustable Rate Loans
Number of Loans Aggregate Principal by Outstanding Principal
as of Cut-off Balance Outstanding Balance as of
Maximum Loan Rates Date as of Cut-off Date Cut-off Date
- ------------------ --------------- ------------------- ------------------------
<S> <C> <C> <C>
Less than 13.000%....... 16 $ 1,526,760.53 1.79%
13.000 to 13.249%....... 0 0.00 0.00
13.250 to 13.499%....... 3 512,385.05 0.60
13.500 to 13.749%....... 2 224,157.29 0.26
13.750 to 13.999%....... 28 3,875,360.54 4.55
14.000 to 14.249%....... 4 420,381.03 0.49
14.250 to 14.499%....... 18 2,139,196.76 2.51
14.500 to 14.749%....... 66 8,371,693.17 9.84
14.750 to 14.999%....... 111 12,627,962.73 14.84
15.000 to 15.249%....... 34 4,301,605.64 5.06
15.250 to 15.499%....... 83 9,423,195.29 11.07
15.500 to 15.749%....... 68 7,064,922.79 8.30
15.750 to 15.999%....... 97 9,814,829.59 11.54
16.000 to 16.249%....... 31 3,090,776.68 3.63
16.250 to 16.499%....... 45 5,052,000.96 5.94
16.500 to 16.749%....... 48 4,154,641.79 4.88
16.750 to 16.999%....... 52 4,984,401.01 5.86
17.000 to 17.249%....... 14 1,225,030.22 1.44
17.250 to 17.499%....... 21 1,846,160.36 2.17
17.500 to 17.749%....... 19 1,927,879.70 2.27
17.750 to 17.999%....... 11 1,103,729.31 1.30
18.000 to 18.249%....... 7 667,018.03 0.78
18.250 to 18.499%....... 2 171,776.45 0.20
18.500 to 18.749%....... 1 132,300.00 0.16
18.750 to 18.999%....... 2 129,827.29 0.15
19.000 to 19.249%....... 0 0.00 0.00
19.250 to 19.499%....... 2 135,166.09 0.16
Greater than 19.499%.... 1 163,488.00 0.19
--- -------------- ------
Total............... 786 $85,086,646.30 100.00%
=== ============== ======
</TABLE>
S-26
<PAGE>
Minimum Loan Rates--Initial Group I Adjustable Rate Loans
<TABLE>
<CAPTION>
% of
Initial Group I
Adjustable Rate
Number of Loans
Loans Aggregate Principal by Outstanding Principal
as of Cut- Balance Outstanding Balance as of
Minimum Loan Rates off Date as of Cut-off Date Cut-off Date
- ------------------ ---------- ------------------- ------------------------
<S> <C> <C> <C>
Less than 7.250%...... 3 $ 330,484.39 0.39%
7.250 to 7.499%...... 2 361,107.34 0.42
7.500 to 7.749%...... 3 520,056.27 0.61
7.750 to 7.999%...... 33 4,590,309.95 5.39
8.000 to 8.249%...... 9 1,084,136.46 1.27
8.250 to 8.499%...... 23 2,756,075.41 3.24
8.500 to 8.749%...... 75 9,217,878.36 10.83
8.750 to 8.999%...... 122 13,887,373.28 16.32
9.000 to 9.249%...... 30 3,568,352.54 4.19
9.250 to 9.499%...... 87 9,573,672.47 11.25
9.500 to 9.749%...... 79 8,213,966.74 9.65
9.750 to 9.999%...... 108 10,827,506.48 12.73
10.000 to 10.249%...... 28 2,809,477.91 3.30
10.250 to 10.499%...... 45 5,007,688.98 5.89
10.500 to 10.749%...... 49 4,406,416.26 5.18
10.750 to 10.999%...... 41 3,681,441.35 4.33
11.000 to 11.249%...... 16 1,422,927.80 1.67
11.250 to 11.499%...... 11 811,430.84 0.95
11.500 to 11.749%...... 7 654,629.04 0.77
11.750 to 11.999%...... 9 824,290.61 0.97
12.000 to 12.249%...... 3 301,007.73 0.35
12.250 to 12.499%...... 1 101,250.00 0.12
Greater than 12.499%... 2 135,166.09 0.16
--- -------------- ------
Total................ 786 $85,086,646.30 100.00%
=== ============== ======
</TABLE>
Group II Adjustable Rate Loans
As of the Cut-off Date, the Initial Group II Adjustable Rate Loans had Loan
Rates ranging from 6.99% to 13.38% and a weighted average Loan Rate of 9.34%.
As of the Cut-off Date, the weighted average Maximum Loan Rate of the Initial
Group II Adjustable Rate Loans was 15.47%, with Maximum Loan Rates that range
from 9.75% to 24.00%. As of the Cut-Off Date, the Initial Group II Adjustable
Rate Loans had a weighted average gross margin of 6.64% and gross margins
ranging from 4.50% to 11.75%. As of the Cut-off Date, the Initial Group II
Adjustable Rate Loans had remaining maturities of at least 345 months but not
more than 360 months and original maturities of at least 358 months but not
more than 360 months. The Initial Group II Adjustable Rate Loans had a weighted
average term to scheduled maturity, as of origination, of 360 months, and a
weighted average term to scheduled maturity, as of the Cut-off Date, of 358
months. The average principal balance per Initial Group II Adjustable Rate Loan
as of the Cut-off Date was $126,863.73 and the principal balances on the
Initial Group II Adjustable Rate Loans as of the Cut-off Date ranged from
$22,653.96 to $417,921.86. The Initial Group II Adjustable Rate Loans arise
from loans relating to real property located in 41 states and the District of
Columbia. By principal balance as of the Cut-off Date, approximately 15.40% of
the Initial Group II Adjustable Rate Loans were secured by real property
located in California, 9.55% in Maryland, 6.33% in Ohio, 7.60% in Washington
and 5.27% in Florida. No other state represented 5.00% or more of the aggregate
Cut-off Date Principal Balance of the Initial Group II Adjustable Rate Loans.
S-27
<PAGE>
Set forth below is a description of certain additional characteristics of the
Initial Group II Adjustable Rate Loans. Percentages in these tables may not add
up to 100.00% due to rounding.
Geographical Distribution of Mortgaged Properties--Initial Group II Adjustable
Rate Loans
<TABLE>
<CAPTION>
% of Initial
% of Initial Group II
Group II Adjustable
Adjustable Rate Loans
Rate Loans Aggregate Principal by Outstanding
by Number of Balance Principal
Number of Loans Loans as Outstanding as of Balance as of
State as of Cut-off Date of Cut-off Date Cut-off Date Cut-off Date
- ----- ------------------ --------------- ------------------- --------------
<S> <C> <C> <C> <C>
Alabama................. 15 2.24% $ 1,380,349.39 1.62%
Arizona................. 11 1.64 1,337,219.10 1.57
Arkansas................ 3 0.45 186,427.50 0.22
California.............. 67 9.99 13,111,040.82 15.40
Colorado................ 31 4.62 4,070,182.73 4.78
Connecticut............. 4 0.60 601,511.91 0.71
Delaware................ 2 0.30 252,604.76 0.30
District Of Columbia.... 4 0.60 496,363.40 0.58
Florida................. 43 6.41 4,489,657.16 5.27
Georgia................. 19 2.83 2,395,850.47 2.81
Idaho................... 4 0.60 588,472.14 0.69
Illinois................ 12 1.79 1,646,218.48 1.93
Indiana................. 37 5.51 3,486,657.16 4.10
Iowa.................... 1 0.15 88,092.76 0.10
Kansas.................. 3 0.45 232,915.84 0.27
Kentucky................ 13 1.94 927,994.49 1.09
Louisiana............... 11 1.64 1,068,259.07 1.25
Maryland................ 44 6.56 8,127,598.44 9.55
Massachusetts........... 9 1.34 1,226,950.56 1.44
Michigan................ 15 2.24 1,590,944.70 1.87
Mississippi............. 2 0.30 114,966.96 0.14
Missouri................ 5 0.75 493,128.56 0.58
Nevada.................. 4 0.60 398,794.34 0.47
New Hampshire........... 3 0.45 391,288.94 0.46
New Jersey.............. 2 0.30 455,866.39 0.54
New Mexico.............. 5 0.75 430,215.73 0.51
New York................ 3 0.45 345,027.67 0.41
North Carolina.......... 35 5.22 3,737,201.24 4.39
Ohio.................... 61 9.09 5,390,045.42 6.33
Oklahoma................ 4 0.60 225,922.15 0.27
Oregon.................. 27 4.02 3,329,613.44 3.91
Pennsylvania............ 12 1.79 1,466,566.24 1.72
Rhode Island............ 4 0.60 762,321.08 0.90
South Carolina.......... 11 1.64 1,063,768.46 1.25
Tennessee............... 26 3.87 2,675,320.16 3.14
Texas................... 34 5.07 4,142,656.22 4.87
Utah.................... 22 3.28 2,809,112.48 3.30
Virginia................ 11 1.64 2,349,031.43 2.76
Washington.............. 44 6.56 6,473,087.04 7.60
West Virginia........... 1 0.15 190,833.24 0.22
Wisconsin............... 6 0.89 513,756.43 0.60
Wyoming................. 1 0.15 61,731.52 0.07
--- ------ -------------- ------
Total............... 671 100.00% $85,125,566.02 100.00%
=== ====== ============== ======
</TABLE>
S-28
<PAGE>
Years of Origination--Initial Group II Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group II
Adjustable Rate
Loans by
Aggregate Principal Outstanding Principal
Number of Loans Balance Outstanding Balance as of
Year of Origination as of Cut-off Date as of Cut-off Date Cut-off Date
- ------------------- ------------------ ------------------- ---------------------
<S> <C> <C> <C>
1997.................... 2 $ 132,256.80 0.16%
1998.................... 646 82,165,834.22 96.52
1999.................... 23 2,827,475.00 3.32
--- -------------- ------
Total............... 671 $85,125,566.02 100.00%
=== ============== ======
</TABLE>
Distribution of Original Loan Amounts--Initial Group II Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group II
Adjustable Rate
Loans by
Aggregate Principal Outstanding Principal
Number of Loans Balance Outstanding Balance as of
Original Loan Amount as of Cut-off Date as of Cut-off Date Cut-off Date
-------------------- ------------------ ------------------- ---------------------
<S> <C> <C> <C>
Less than$ 30,000.00.... 5 $ 133,813.42 0.16%
$ 30,000.00 to
$ 39,999.99............ 9 317,103.26 0.37
$ 40,000.00 to
$ 49,999.99............ 24 1,111,416.36 1.31
$ 50,000.00 to
$ 59,999.99............ 46 2,537,828.44 2.98
$ 60,000.00 to
$ 69,999.99............ 65 4,258,006.02 5.00
$ 70,000.00 to
$ 79,999.99............ 50 3,712,179.84 4.36
$ 80,000.00 to
$ 89,999.99............ 54 4,553,044.32 5.35
$ 90,000.00 to
$ 99,999.99............ 44 4,135,982.84 4.86
$100,000.00 to
$109,999.99............ 40 4,169,216.91 4.90
$110,000.00 to
$119,999.99............ 49 5,605,443.26 6.58
$120,000.00 to
$129,999.99............ 42 5,239,851.61 6.16
$130,000.00 to
$139,999.99............ 38 5,128,333.92 6.02
$140,000.00 to
$149,999.99............ 19 2,761,765.63 3.24
$150,000.00 to
$159,999.99............ 22 3,383,267.30 3.97
$160,000.00 to
$169,999.99............ 24 3,942,032.21 4.63
$170,000.00 to
$179,999.99............ 14 2,425,138.40 2.85
$180,000.00 to
$189,999.99............ 12 2,231,388.52 2.62
$190,000.00 to
$199,999.99............ 12 2,356,133.21 2.77
$200,000.00 to
$209,999.99............ 5 1,023,715.12 1.20
$210,000.00 to
$219,999.99............ 7 1,504,856.80 1.77
Greater than
$219,999.99............ 90 24,595,048.63 28.89
--- -------------- ------
Total............... 671 $85,125,566.02 100.00%
=== ============== ======
</TABLE>
S-29
<PAGE>
Current Loan Rates--Initial Group II Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group II
Aggregate Principal Adjustable Rate Loans by
Number of Loans Balance Outstanding Outstanding Principal
Loan Rate as of Cut-off Date as of Cut-off Date Balance as of Cut-off Date
- --------- ------------------ ------------------- --------------------------
<S> <C> <C> <C>
Less than 7.01%......... 1 $ 138,323.66 0.16%
7.01 to 8.00%........... 29 4,666,460.53 5.48
8.01 to 9.00%........... 229 32,629,305.82 38.33
9.01 to 10.00%.......... 274 34,297,190.47 40.29
10.01 to 11.00%......... 104 10,545,985.82 12.39
11.01 to 12.00%......... 31 2,601,402.01 3.06
12.01 to 13.00%......... 2 164,115.09 0.19
Greater than 13.00%..... 1 82,782.62 0.10
--- -------------- ------
Total............... 671 $85,125,566.02 100.00%
=== ============== ======
</TABLE>
Remaining Months to Maturity--Initial Group II Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group II
Months Remaining to Aggregate Principal Adjustable Rate Loans by
Scheduled Maturity Number of Loans Balance Outstanding Outstanding Principal
As of Cut-off Date as of Cut-off Date as of Cut-off Date Balance as of Cut-off Date
------------------- ------------------ ------------------- --------------------------
<S> <C> <C> <C>
331--360................ 671 $85,125,566.02 100.00%
--- -------------- ------
Total............... 671 $85,125,566.02 100.00%
=== ============== ======
</TABLE>
Lien Position--Initial Group II Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group II
Aggregate Principal Adjustable Rate Loans by
Number of Loans Balance Outstanding Outstanding Principal
Lien Position as of Cut-off Date as of Cut-off Date Balance as of Cut-off Date
- ------------- ------------------ ------------------- --------------------------
<S> <C> <C> <C>
First........ 671 $85,125,566.02 100.00%
--- -------------- ------
Total.... 671 $85,125,566.02 100.00%
=== ============== ======
</TABLE>
Loan-to-Value Ratio--Initial Group II Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group II
Aggregate Principal Adjustable Rate Loans by
Number of Loans Balance Outstanding Outstanding Principal
Loan-to-Value Ratio as of Cut-off Date as of Cut-off Date Balance as of Cut-off Date
- ------------------- ------------------ ------------------- --------------------------
<S> <C> <C> <C>
10.01--20.00%........... 1 $ 34,906.43 0.04%
20.01--30.00%........... 1 59,591.65 0.07
30.01--40.00%........... 2 123,456.48 0.15
40.01--50.00%........... 5 451,802.47 0.53
50.01--60.00%........... 6 804,157.78 0.94
60.01--70.00%........... 20 2,306,675.77 2.71
70.01--80.00%........... 165 20,078,318.22 23.59
80.01--90.00%........... 308 39,286,055.01 46.15
Greater than 90.00%..... 163 21,980,602.21 25.82
--- -------------- ------
Total............... 671 $85,125,566.02 100.00%
=== ============== ======
</TABLE>
S-30
<PAGE>
Month of Next Rate Adjustment--Initial Group II Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group II
Aggregate Principal Adjustable Rate Loans
Number of Loans Balance Outstanding by Outstanding Principal
Month of Next Rate Adjustment as of Cut-off Date as of Cut-off Date Balance as of Cut-off Date
- ----------------------------- ------------------ ------------------- --------------------------
<S> <C> <C> <C>
January 1999................ 1 $ 142,130.06 0.17%
May 1999.................... 1 76,459.92 0.09
September 1999.............. 1 109,602.84 0.13
October 1999................ 1 22,653.96 0.03
December 1999............... 1 377,832.42 0.44
January 2000................ 2 265,555.71 0.31
February 2000............... 1 138,323.66 0.16
March 2000.................. 1 151,866.39 0.18
April 2000.................. 1 103,604.85 0.12
May 2000.................... 3 662,733.31 0.78
June 2000................... 12 1,644,423.38 1.93
July 2000................... 21 2,685,808.38 3.16
August 2000................. 35 4,612,589.04 5.42
September 2000.............. 105 13,567,286.40 15.94
October 2000................ 145 19,204,315.74 22.56
November 2000............... 176 21,621,360.89 25.40
December 2000............... 123 15,289,629.61 17.96
January 2001................ 23 2,855,215.00 3.35
February 2001............... 2 264,915.00 0.31
July 2001................... 1 37,322.28 0.04
August 2001................. 2 177,928.91 0.21
September 2001.............. 3 296,071.64 0.35
October 2001................ 5 461,872.92 0.54
November 2001............... 2 152,410.90 0.18
December 2001............... 3 203,652.81 0.24
--- -------------- ------
Total................... 671 $85,125,566.02 100.00%
=== ============== ======
</TABLE>
S-31
<PAGE>
Distribution of Gross Margin--Initial Group II Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group II
Aggregate Principal Adjustable Rate Loans
Number of Loans Balance Outstanding by Outstanding Principal
Gross Margin as of Cut-off Date as of Cut-off Date Balance as of Cut-off Date
- ------------ ------------------ ------------------- --------------------------
<S> <C> <C> <C>
Less than 4.750%........ 2 $ 296,243.81 0.35%
4.750 to 4.999%......... 5 547,575.11 0.64
5.000 to 5.249%......... 5 540,938.69 0.64
5.250 to 5.499%......... 14 2,224,467.65 2.61
5.500 to 5.749%......... 26 3,274,612.14 3.85
5.750 to 5.999%......... 68 9,176,960.30 10.78
6.000 to 6.249%......... 69 9,229,734.80 10.84
6.250 to 6.499%......... 86 11,307,728.06 13.28
6.500 to 6.749%......... 86 12,106,405.79 14.22
6.750 to 6.999%......... 110 14,824,543.20 17.41
7.000 to 7.249%......... 49 6,139,156.05 7.21
7.250 to 7.499%......... 32 3,542,889.50 4.16
7.500 to 7.749%......... 38 3,964,668.00 4.66
7.750 to 7.999%......... 26 2,486,977.09 2.92
8.000 to 8.249%......... 22 2,092,648.98 2.46
8.250 to 8.499%......... 6 521,227.96 0.61
8.500 to 8.749%......... 15 1,328,753.19 1.56
8.750 to 8.999%......... 6 881,277.58 1.04
9.000 to 9.249%......... 2 188,198.97 0.22
9.250 to 9.499%......... 1 124,169.10 0.15
9.500 to 9.749%......... 0 0.00 0.00
Greater than 9.749%..... 3 326,390.05 0.38
--- -------------- ------
Total............... 671 $85,125,566.02 100.00%
=== ============== ======
</TABLE>
S-32
<PAGE>
Maximum Loan Rates--Initial Group II Adjustable Rate Loans
<TABLE>
<CAPTION>
% of Initial Group II
Adjustable Rate Loans
Number of Loans Aggregate Principal by Outstanding Principal
as of Cut-off Balance Outstanding Balance as of
Maximum Loan Rates Date as of Cut-off Date Cut-off Date
- ------------------ --------------- ------------------- ------------------------
<S> <C> <C> <C>
Less than 13.000%....... 8 $ 1,046,302.60 1.23%
13.000 to 13.249%....... 0 0.00 0.00
13.250 to 13.499%....... 2 232,907.19 0.27
13.500 to 13.749%....... 3 502,815.25 0.59
13.750 to 13.999%....... 16 2,898,826.45 3.41
14.000 to 14.249%....... 8 1,170,740.59 1.38
14.250 to 14.499%....... 18 2,555,912.43 3.00
14.500 to 14.749%....... 54 8,653,671.33 10.17
14.750 to 14.999%....... 113 14,649,231.80 17.21
15.000 to 15.249%....... 35 4,628,524.29 5.44
15.250 to 15.499%....... 68 8,960,365.65 10.53
15.500 to 15.749%....... 57 7,370,917.00 8.66
15.750 to 15.999%....... 98 12,693,074.84 14.91
16.000 to 16.249%....... 26 3,199,122.67 3.76
16.250 to 16.499%....... 40 4,943,372.95 5.81
16.500 to 16.749%....... 32 3,276,508.27 3.85
16.750 to 16.999%....... 41 3,953,180.25 4.64
17.000 to 17.249%....... 10 974,816.87 1.15
17.250 to 17.499%....... 12 1,144,752.56 1.34
17.500 to 17.749%....... 7 494,311.88 0.58
17.750 to 17.999%....... 5 382,063.51 0.45
18.000 to 18.249%....... 7 470,763.96 0.55
18.250 to 18.499%....... 3 260,263.10 0.31
18.500 to 18.749%....... 3 235,355.76 0.28
18.750 to 18.999%....... 1 67,370.89 0.08
19.000 to 19.249%....... 0 0.00 0.00
19.250 to 19.499%....... 0 0.00 0.00
19.500 to 19.749%....... 1 124,169.10 0.15
19.750 to 19.999%....... 0 0.00 0.00
Greater than 19.999%.... 3 236,224.83 0.28
--- -------------- ------
Total............... 671 $85,125,566.02 100.00%
=== ============== ======
</TABLE>
S-33
<PAGE>
Minimum Loan Rates--Initial Group II Adjustable Rate Loans
<TABLE>
<CAPTION>
% of
Initial Group II
Adjustable Rate
Number of Loans
Loans Aggregate Principal by Outstanding Principal
as of Cut- Balance Outstanding Balance as of
Minimum Loan Rates off Date as of Cut-off Date Cut-off Date
- ------------------ ---------- ------------------- ------------------------
<S> <C> <C> <C>
Less than 7.250%...... 3 $ 485,366.63 0.57%
7.250 to 7.499%...... 2 232,907.19 0.27
7.500 to 7.749%...... 3 331,985.61 0.39
7.750 to 7.999%...... 21 3,627,018.80 4.26
8.000 to 8.249%...... 10 1,692,920.83 1.99
8.250 to 8.499%...... 23 3,372,558.33 3.96
8.500 to 8.749%...... 68 10,656,541.05 12.52
8.750 to 8.999%...... 122 15,833,605.33 18.60
9.000 to 9.249%...... 39 5,146,981.34 6.05
9.250 to 9.499%...... 81 9,680,911.63 11.37
9.500 to 9.749%...... 52 6,472,721.67 7.60
9.750 to 9.999%...... 100 13,091,481.20 15.38
10.000 to 10.249%...... 23 2,710,399.38 3.18
10.250 to 10.499%...... 27 2,966,584.70 3.48
10.500 to 10.749%...... 24 2,293,121.29 2.69
10.750 to 10.999%...... 33 3,073,316.40 3.61
11.000 to 11.249%...... 14 1,090,120.34 1.28
11.250 to 11.499%...... 9 902,481.52 1.06
11.500 to 11.749%...... 10 729,667.64 0.86
11.750 to 11.999%...... 3 191,610.89 0.23
12.000 to 12.249%...... 0 0.00 0.00
12.250 to 12.499%...... 1 39,945.99 0.05
12.500 to 12.749%...... 1 124,169.10 0.15
Greater than 12.749%... 2 379,149.16 0.45
--- -------------- ------
Total................ 671 $85,125,566.02 100.00%
=== ============== ======
</TABLE>
S-34
<PAGE>
Delinquency Information
The following table sets forth information relating to the Company's
delinquency experience with respect to all home equity loans serviced by the
Company. Not all such home equity loans are of the type to be included in the
Loan Pool and thus the information presented is not necessarily indicative of
the Company's delinquency experience with respect to home equity loans similar
to the Loans. In addition, the Company began originating, purchasing and
servicing home equity loans in January 1996, and thus has no significant
experience with respect to the performance of such loans. Moreover, because all
such home equity loans have been recently originated, it is likely that this
experience is not indicative of the delinquency experience to be expected from
a more seasoned portfolio.
Delinquency Experience
<TABLE>
<CAPTION>
At December 31,
-----------------
1998 1997
-------- -------
<S> <C> <C>
Number of Loans Outstanding(1)............................... 114,399 65,355
Number of Loans Delinquent(2)(3)
30-59 Days................................................. 2,390 1,141
60-89 Days................................................. 670 283
90 Days or More............................................ 801 411
-------- -------
Total Loans Delinquent....................................... 3,861 1,835
Delinquencies as a Percent of Loans Outstanding(4)........... 3.38% 2.81%
</TABLE>
- --------
(1) Excludes defaulted loans not yet liquidated.
(2) A loan is considered delinquent by the Company if any payment of $25 or
more is past-due 30 days or more.
(3) The period of delinquency is based on the number of days that payments are
contractually past-due (assuming 30-day months). Consequently, a loan due
on the first day of a month is not 30 days delinquent until the first day
of the next month. This table does not include as delinquent the home
equity loans of obligors who have entered bankruptcy proceedings, provided
that such obligors are current under their bankruptcy payment plan.
(4) By number of loans.
Because of the Company's limited historical experience with respect to the
performance of home equity loans, no information has been included herein with
respect to the Company's loan loss or liquidation experience with respect to
home equity loans.
S-35
<PAGE>
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of any Certificate will depend on the price paid by the
Certificateholder and will be sensitive to the rate and timing of principal
payments (including prepayments, repurchases, defaults and liquidations) on the
Loans, which may fluctuate significantly from time to time. The Loans generally
may be prepaid in full or in part at any time.
Higher than expected "Principal Prepayments" (payments received from
Obligors, other than regular payments of principal, which are applied upon
receipt or, in the case of partial prepayments, upon the next scheduled payment
date for such Loan, to reduce the outstanding principal balance on the Loan)
will increase the yield on Certificates purchased at a price less than par and
will decrease the yield on Certificates purchased at a price greater than par.
The Company has no significant experience with respect to the rate of Principal
Prepayments on home equity loans. Because the Loans have scheduled due dates
throughout the calendar month, prepayments on the Loans would affect the amount
of funds available to make distributions on the Certificates on any Payment
Date only if a substantial portion of the Loans prepaid prior to their
respective due dates in the preceding month (thus paying less than 30 days'
interest for that month) while very few Loans prepaid after their respective
due dates in the preceding month. In addition, liquidations of Defaulted Loans
or the Servicer's exercise of its option to repurchase the entire remaining
pool of Loans (see "Description of the Certificates--Repurchase Option" herein)
will affect the timing of principal distributions on the Certificates. Under
the Agreement, the Company has the option of substituting new loans for Loans
which are prepaid in full prior to June 1, 1999. See "Description of the
Certificates--Conveyance of Loans" herein. There is no assurance that the
Company will exercise its option to make any such substitutions nor, should it
desire to exercise such option, that loans meeting the eligibility criteria
will be available therefor. To the extent any such substitutions are made, the
impact on the Loan Pool and the Certificates of what would otherwise have
constituted a Principal Prepayment will be averted.
The Class B-2A Certificates will be affected by Principal Prepayments
differently than the other classes of Certificates. A high rate of Principal
Prepayments generally would reduce the amount of Class B-2A Additional
Principal Distribution Amounts (as described under "Description of the
Certificates--Distributions on Certificates--Class B-2A Principal") paid, which
would extend the average life of the Class B-2A Certificates. See "--Weighted
Average Life of the Certificates" below.
The Class A-1A ARM, Class A-1B ARM and Class A-1 Certificates may be prepaid
in part on the first Payment Date after the Funding Period in the event that
any Pre-Funded Amount remains in the Pre-Funding Account on such Payment Date.
Any amounts remaining which had been allocated to the purchase of Subsequent
Adjustable Rate Loans will be paid to the Class A-1A ARM and Class A-1B ARM
Certificateholders and any amounts remaining which had been allocated to the
purchase of Subsequent Fixed-Rate Loans will be paid to the Class A-1
Certificateholders. The Company believes that the principal amount of
Subsequent Loans to be purchased by the Trust will require the application of
substantially all of the Pre-Funded Amount. It is unlikely, however, that the
aggregate principal amount of Subsequent Loans purchased by the Trust will be
identical to the Pre-Funded Amount and, consequently, Class A-1A ARM, Class A-
1B ARM and Class A-1 Certificateholders will receive some prepayment of
principal.
Prepayments on home equity loans are commonly measured relative to a
prepayment standard or model. The Constant Prepayment Rate ("CPR") model
assumes that the outstanding principal balance of a pool of loans prepays each
month at a specified constant annual rate. The Certificates were priced using a
prepayment assumption of, with respect to the Fixed-Rate Loans, 125% of the
applicable Prepayment Assumption (as described below), and with respect to the
Adjustable Rate Loans, 30% of CPR. There can be no assurance that the Loans
will prepay at the applicable rate, and it is unlikely that prepayments or
liquidations of the Loans will occur at any constant rate.
The amount of interest to which the Certificateholders of any Class are
entitled on any Payment Date will be the product of the related Pass-Through
Rate and (in the absence of any liquidation loss principal amount adjustment)
the Principal Balance of such Class or, in the case of the Class A-6 IO
Certificates, the Notional Principal Amount, immediately following the
preceding Payment Date. Interest on each Class of Certificates, other than the
Class A-1A ARM and Class A-1B ARM Certificates, will be computed on the basis
of a
S-36
<PAGE>
360-day year of twelve 30-day months. Interest on the Class A-1A ARM and Class
A-1B ARM Certificates will be computed on the basis of actual days elapsed in a
360-day year. Certificateholders will receive payments in respect of principal
on each Payment Date to the extent that funds available in the Certificate
Account are sufficient therefor, in the priority described under "Description
of the Certificates--Distributions on Certificates." As required by applicable
state laws, interest paid by Obligors on the Loans is computed according to the
simple interest method.
The final scheduled payment date on the Initial Loan with the latest maturity
is in February 2029. The expected final maturity of each Class of Certificates,
based on the assumptions that there are no defaults, prepayments or
delinquencies with respect to payments due under the Loans and that the
repurchase option has not been exercised, are as follows:
<TABLE>
<CAPTION>
Class Expected Final Maturity
----- -----------------------
<S> <C>
A-1A ARM............................................. February 15, 2029
A-1B ARM............................................. February 15, 2029
A-1.................................................. February 15, 2013
A-2.................................................. February 15, 2014
A-3.................................................. April 15, 2018
A-4.................................................. March 15, 2019
A-5.................................................. February 15, 2019
A-6 IO............................................... March 15, 2001
M-1.................................................. August 15, 2026
M-2.................................................. February 15, 2029
B-1.................................................. November 15, 2027
B-2A................................................. February 15, 2029
B-2.................................................. February 15, 2029
</TABLE>
Weighted Average Life of the Certificates
The following information is given solely to illustrate the effect of
prepayments of the related Loans on the weighted average life of each Class of
Certificates under the stated assumptions and is not a prediction of the
prepayment rate that might actually be experienced by the Loans.
Weighted average life refers to the average amount of time from the date of
issuance of a security until each dollar of principal of such security will be
repaid to the investor. The weighted average life of the Certificates will be
influenced by the rate at which principal on the related Loans is paid.
Principal payments on Loans may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayment" includes repayments and
liquidations due to default or other dispositions of the Loans).
The rate of principal payments on pools of home equity loans is influenced by
a variety of economic, geographic, social and other factors, including the
level of interest rates and the rate at which homeowners sell their homes or
default on their loans. Other factors affecting prepayment of Loans include
changes in obligors' housing needs, job transfers, unemployment and obligors'
net equity in their homes. In the case of home equity loans secured by real
estate, in general, if prevailing interest rates fall significantly below the
interest rates on such loans, the loans are likely to be subject to higher
prepayment rates than if prevailing interest rates remained at or above the
rates borne by such loans. Conversely, if prevailing interest rates rise above
the interest rates on such home equity loans, the rate of prepayment would be
expected to decrease.
The percentages and weighted average lives in the following tables were
determined assuming that: (i) scheduled interest and principal payments on the
Loans are received in a timely manner and prepayments are made at the indicated
percentages of the model as described below set forth in the table; (ii) the
Servicer exercises its option to repurchase the Loans, as described under
"Description of the Certificates--Repurchase Option;" (iii) the aggregate
principal balance of the Initial Loans as of the Cut-off Date is
$582,836,310.64 and such Loans have the characteristics set forth under "The
Loans--Fixed-Rate Loans" and "The Loans--Adjustable Rate Loans;" (iv) the
Initial Fixed-Rate Loans will, as of the Cut-off Date, be grouped into seven
S-37
<PAGE>
pools having the additional characteristics set forth below under "Assumed
Initial Fixed-Rate Loan Characteristics" and the Additional and Subsequent
Fixed-Rate Loans will, as of the Cut-off Date, be grouped into seven pools
having the additional characteristics set forth below under "Assumed Additional
and Subsequent Fixed-Rate Loan Characteristics;" (v) the Initial Group I
Adjustable Rate Loans will, as of the Cut-off Date, be grouped into four pools
having the additional characteristics set forth below under "Assumed Initial
Group I Adjustable Rate Loan Characteristics" and the Additional and Subsequent
Group I Adjustable Rate Loans will, as of the Cut-off Date, be grouped into
four pools having the additional characteristics set forth below under "Assumed
Additional and Subsequent Group I Adjustable Rate Loan Characteristics;"
(vi) the Initial Group II Adjustable Rate Loans will, as of the Cut-off Date,
be grouped into four pools having the additional characteristics set forth
below under "Assumed Initial Group II Adjustable Rate Loan Characteristics" and
the Additional and Subsequent Group II Adjustable Rate Loans will, as of the
Cut-off Date, be grouped into four pools having the additional characteristics
set forth below under "Assumed Additional and Subsequent Group II Adjustable
Rate Loan Characteristics;" (vii) each Class of the Certificates (other than
the Class A-6 IO Certificates) has an Original Principal Balance as shown on
the cover page of this Prospectus Supplement; (viii) the rates for one-month
and six-month LIBOR are 4.93688% and 5.06031%, respectively; (ix) the
Subsequent Loans will have their first scheduled payment date in April 1999;
(x) no interest shortfalls will arise in connection with prepayments in full of
the Loans; (xi) no delinquencies or losses are experienced on the Loans;
(xii) distributions are made on the Certificates on the 15th day of each month,
commencing in April 1999; (xiii) the Certificates are issued on March 18, 1999;
(xiv) the Company does not exercise its option to substitute home equity loans
for Loans prepaid in full (as described under "Description of the
Certificates--Conveyance of Loans"); and (xv) the initial Pass-Through Rate for
the Class A-1A ARM Certificates is 5.19688% and the initial Pass-Through Rate
for the Class A-1B ARM Certificates is 5.21688%. No representation is made that
the Loans will not experience delinquencies or losses.
Prepayments on home equity loans are commonly measured relative to a
prepayment standard or model. Two different models (each a "Prepayment
Assumption") are used in this Prospectus Supplement, one for the Adjustable
Rate Loans and the other for the Fixed-Rate Loans. Reference in this Prospectus
Supplement to a "Prepayment Assumption" shall refer to the appropriate model,
depending upon whether the reference is with respect to the Adjustable Rate
Loans or the Fixed-Rate Loans.
The percentages and weighted average life information for the Class A-1A ARM
Certificates and the Class A-1B ARM Certificates in the following tables are
based on a CPR model that assumes that the outstanding principal balance of the
Group I Adjustable Rate Loans and the Group II Adjustable Rate Loans,
respectively, will prepay at the percentages of CPR set forth in the Prepayment
Scenarios table below.
The Prepayment Assumption used for the Fixed-Rate Loans represents an assumed
rate of prepayment each month relative to the then outstanding principal
balance of a pool of home equity loans for the life of such home equity loans.
The "100% Prepayment Assumption" assumes a constant prepayment of 4% per annum
of the then outstanding principal balance of such loans in the first month of
the life of such loans and an additional 1.45% (precisely, 16/11%) per annum in
each month thereafter until the twelfth month. Beginning in the twelfth month
and in each month thereafter during the life of such loans, the 100% Prepayment
Assumption assumes a constant prepayment rate of 20% per annum each month.
It is not likely that the Loans will prepay at any constant percentage of the
Prepayment Assumption or of the CPR to maturity or that all of the Loans will
prepay at the same rate.
Investors are urged to make their investment decisions on a basis that
includes their determination as to anticipated prepayment rates under a variety
of the assumptions discussed herein.
Prepayment Scenarios
<TABLE>
<CAPTION>
Scenario I Scenario II Scenario III Scenario IV Scenario V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Adjustable Rate Loans
(1).................... 18% 24% 30% 36% 42%
Fixed-Rate Loans (2).... 75% 100% 125% 150% 175%
</TABLE>
- --------
(1) As a CPR percentage.
(2) As a percentage of the Prepayment Assumption.
S-38
<PAGE>
Assumed Initial Fixed-Rate Loan Characteristics
<TABLE>
<CAPTION>
Weighted Weighted Balloon Loan
Weighted Average Average Weighted
Cut-off Date Average Remaining Term Original Term Average
Pool Principal Loan to Maturity to Maturity Amortization
Pool Balance Rate (months) (months) Term
- ---- -------------- -------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1. .......... $15,841,491.97 12.136% 107 111 N/A
2. .......... 61,898,578.88 11.891 175 179 N/A
3. .......... 92,199,603.87 11.649 239 240 N/A
4. .......... 64,288,076.34 11.195 299 300 N/A
5. .......... 80,611,199.75 10.560 358 360 N/A
6. .......... 66,538,596.16 11.206 360 360 179
7. .......... 31,246,551.35 10.920 360 360 240
</TABLE>
Assumed Additional and Subsequent Fixed-Rate Loan Characteristics
<TABLE>
<CAPTION>
Weighted Weighted Balloon Loan
Weighted Average Average Weighted
Cut-off Date Average Remaining Term Original Term Average
Pool Principal Loan to Maturity to Maturity Amortization
Pool Balance Rate (months) (months) Term
- ---- --------------- -------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
1. ........ $ 18,711,368.20 12.136% 107 107 N/A
2. ........ 73,112,248.70 11.891 175 175 N/A
3. ........ 108,902,667.72 11.649 239 239 N/A
4. ........ 75,934,632.27 11.195 299 299 N/A
5. ........ 95,214,885.23 10.560 358 358 N/A
6. ........ 78,592,860.75 11.206 360 360 179
7. ........ 36,907,238.82 10.920 360 360 240
</TABLE>
Assumed Initial Group I Adjustable Rate Loan Characteristics
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Weighted Remaining Original Weighted
Cut-off Date Average Term to Term to Average Month(s)
Pool Principal Loan Maturity Maturity Gross Life Life Periodic to Rate
Pool Balance Rate (months) (months) Margin Cap Floor Cap Change
- ---- -------------- -------- --------- -------- -------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. ..................... $ 2,565,140.43 10.111% 357 360 7.365% 16.304% 10.111% 1.158% 32
2. ..................... 76,960,500.62 9.447 358 360 6.695 15.556 9.447 1.218 21
3. ..................... 4,972,680.46 9.030 354 360 6.098 15.131 8.976 1.232 17
4. ..................... 588,324.79 9.218 357 360 6.201 14.558 9.218 1.263 3
</TABLE>
Assumed Additional and Subsequent Group I Adjustable Rate Loan Characteristics
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Weighted Remaining Original Weighted
Cut-off Date Average Term to Term to Average Month(s)
Pool Principal Loan Maturity Maturity Gross Life Life Periodic to Rate
Pool Balance Rate (months) (months) Margin Cap Floor Cap Change
- ---- -------------- -------- --------- -------- -------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. ..................... $ 1,956,968.28 10.111% 357 357 7.365% 16.304% 10.111% 1.158% 36
2. ..................... 58,713,845.41 9.447 358 358 6.695 15.556 9.447 1.218 24
3. ..................... 3,793,701.83 9.030 354 354 6.098 15.131 8.976 1.232 24
4. ..................... 448,838.18 9.218 357 357 6.201 14.558 9.218 1.263 6
</TABLE>
S-39
<PAGE>
Assumed Initial Group II Adjustable Rate Loan Characteristics
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Weighted Remaining Original Weighted
Cut-off Date Average Term to Term to Average Month(s)
Pool Principal Loan Maturity Maturity Gross Life Life Periodic to Rate
Pool Balance Rate (months) (months) Margin Cap Floor Cap Change
- ---- -------------- -------- --------- -------- -------- ------ ----- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. ..................... $ 1,329,259.46 9.702% 357 360 7.189% 15.964% 9.702% 1.214% 33
2. ..................... 77,230,207.88 9.365 358 360 6.628 15.492 9.354 1.249 21
3. ..................... 6,347,508.70 8.977 354 360 6.644 15.063 9.113 1.269 16
4. ..................... 218,589.98 9.395 359 360 5.976 15.395 9.395 1.000 1
</TABLE>
Assumed Additional and Subsequent Group II Adjustable Rate Loan Characteristics
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Weighted Remaining Original Weighted
Cut-off Date Average Term to Term to Average Month(s)
Pool Principal Loan Maturity Maturity Gross Life Life Periodic to Rate
Pool Balance Rate (months) (months) Margin Cap Floor Cap Change
- ---- -------------- -------- --------- -------- -------- ------ ----- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. ..................... $ 1,013,032.38 9.702% 357 357 7.189% 15.964% 9.702% 1.214% 36
2. ..................... 58,857,359.27 9.365 358 358 6.628 15.492 9.354 1.249 24
3. ..................... 4,837,454.28 8.977 354 354 6.644 15.063 9.113 1.269 24
4. ..................... 166,588.04 9.395 359 359 5.976 15.395 9.395 1.000 6
</TABLE>
Based on the foregoing assumptions, the following tables indicated the
projected weighted average lives of each Class of Certificates, and set forth
the percentages of the Original Principal Balance of each Class that would be
outstanding after each of the dates shown, under the indicated Prepayment
Scenarios.
Percentage of the Original Principal Balance of the Class A-1A ARM
Certificates at the Respective Percentages of the
CPR Set Forth Below:
<TABLE>
<CAPTION>
Scenario I Scenario II Scenario III Scenario IV Scenario V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
March 15, 2000.......... 81 75 68 62 56
March 15, 2001.......... 66 56 48 40 32
March 15, 2002.......... 54 43 33 25 19
March 15, 2003.......... 44 32 23 16 5
March 15, 2004.......... 36 24 16 3 0
March 15, 2005.......... 29 18 7 0 0
March 15, 2006.......... 24 14 0 0 0
March 15, 2007.......... 19 2 0 0 0
March 15, 2008.......... 16 0 0 0 0
March 15, 2009.......... 7 0 0 0 0
March 15, 2010.......... 0 0 0 0 0
Weighted Average Life
(1) (years)............ 4.2 3.1 2.4 2.0 1.6
</TABLE>
- --------
(1) The weighted average life of a Class A-1A ARM Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class A-1A ARM Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class A-1A ARM Certificate.
S-40
<PAGE>
Percentage of the Original Principal Balance of the Class A-1B ARM
Certificates at the Respective Percentages of the
CPR Set Forth Below:
<TABLE>
<CAPTION>
Scenario I Scenario II Scenario III Scenario IV Scenario V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
March 15, 2000.......... 81 75 68 62 56
March 15, 2001.......... 66 56 48 40 32
March 15, 2002.......... 54 43 33 25 19
March 15, 2003.......... 44 32 23 16 5
March 15, 2004.......... 36 24 16 3 0
March 15, 2005.......... 29 18 7 0 0
March 15, 2006.......... 24 14 0 0 0
March 15, 2007.......... 19 2 0 0 0
March 15, 2008.......... 16 0 0 0 0
March 15, 2009.......... 7 0 0 0 0
March 15, 2010.......... 0 0 0 0 0
Weighted Average Life
(1) (years)............ 4.2 3.1 2.4 2.0 1.6
</TABLE>
- --------
(1) The weighted average life of a Class A-1B ARM Certificate is determined by
(i) multiplying the amount of cash distributions in reduction of the
principal balance of such Certificate by the number of years from the date
of issuance of such Class A-1B ARM Certificate to the stated Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
principal balance of such Class A-1B ARM Certificate.
Percentage of the Original Principal Balance of the Class A-1
Certificates at the Respective Percentages of the
Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Scenario I Scenario II Scenario III Scenario IV Scenario V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
March 15, 2000.......... 63 53 42 31 20
March 15, 2001.......... 17 0 0 0 0
March 15, 2002.......... 0 0 0 0 0
Weighted Average Life
(1) (years)............ 1.3 1.1 0.9 0.8 0.7
</TABLE>
- --------
(1) The weighted average life of a Class A-1 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-1 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-1 Certificate.
Percentage of the Original Principal Balance of the Class A-2 Certificates at
the Respective Percentages of the Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Scenario I Scenario II Scenario III Scenario IV Scenario V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
March 15, 2000.......... 100 100 100 100 100
March 15, 2001.......... 100 90 45 2 0
March 15, 2002.......... 58 0 0 0 0
March 15, 2003.......... 0 0 0 0 0
Weighted Average Life
(1) (years)............ 3.2 2.4 2.0 1.7 1.5
</TABLE>
- --------
(1) The weighted average life of a Class A-2 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-2 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-2 Certificate.
S-41
<PAGE>
Percentage of the Original Principal Balance of the Class A-3 Certificates at
the Respective Percentages of the Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
March 15, 2000.......... 100 100 100 100 100
March 15, 2001.......... 100 100 100 100 61
March 15, 2002.......... 100 98 43 0 0
March 15, 2003.......... 92 38 0 0 0
March 15, 2004.......... 54 2 0 0 0
March 15, 2005.......... 24 0 0 0 0
March 15, 2006.......... 9 0 0 0 0
March 15, 2007.......... 0 0 0 0 0
Weighted Average Life
(1) (years)............ 5.3 3.9 3.0 2.5 2.1
</TABLE>
- --------
(1) The weighted average life of a Class A-3 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-3 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-3 Certificate.
Percentage of the Original Principal Balance of the Class A-4 Certificates at
the Respective Percentages of the Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
March 15, 2000.......... 100 100 100 100 100
March 15, 2001.......... 100 100 100 100 100
March 15, 2002.......... 100 100 100 88 0
March 15, 2003.......... 100 100 69 0 0
March 15, 2004.......... 100 100 17 0 0
March 15, 2005.......... 100 51 0 0 0
March 15, 2006.......... 100 15 0 0 0
March 15, 2007.......... 67 0 0 0 0
March 15, 2008.......... 16 0 0 0 0
March 15, 2009.......... 0 0 0 0 0
Weighted Average Life
(1) (years)............ 8.4 6.2 4.5 3.3 2.8
</TABLE>
- --------
(1) The weighted average life of a Class A-4 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-4 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-4 Certificate.
S-42
<PAGE>
Percentage of the Original Principal Balance of the Class A-5 Certificates at
the Respective Percentages of the Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
March 15, 2000.......... 100 100 100 100 100
March 15, 2001.......... 100 100 100 100 100
March 15, 2002.......... 95 92 89 84 75
March 15, 2003.......... 89 85 79 50 0
March 15, 2004.......... 70 57 35 0 0
March 15, 2005.......... 49 28 0 0 0
March 15, 2006.......... 12 0 0 0 0
March 15, 2007.......... 1 0 0 0 0
March 15, 2008.......... 0 0 0 0 0
Weighted Average Life
(1) (years)............ 5.6 5.1 4.5 3.8 3.2
</TABLE>
- --------
(1) The weighted average life of a Class A-5 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class A-5 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class A-5 Certificate.
Percentage of the Original Principal Balance of the Class M-1
Certificates at the Respective Percentages of the
Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
March 15, 2000.......... 100 100 100 100 100
March 15, 2001.......... 100 100 100 100 100
March 15, 2002.......... 100 100 100 100 100
March 15, 2003.......... 100 100 100 100 100
March 15, 2004.......... 100 100 100 100 34
March 15, 2005.......... 100 100 100 40 0
March 15, 2006.......... 100 100 62 0 0
March 15, 2007.......... 100 100 0 0 0
March 15, 2008.......... 100 54 0 0 0
March 15, 2009.......... 100 0 0 0 0
March 15, 2010.......... 82 0 0 0 0
March 15, 2011.......... 42 0 0 0 0
March 15, 2012.......... 0 0 0 0 0
Weighted Average Life
(1) (years)............ 11.6 9.0 7.1 5.8 4.8
</TABLE>
- --------
(1) The weighted average life of a Class M-1 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class M-1 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class M-1 Certificate.
S-43
<PAGE>
Percentage of the Original Principal Balance of the Class M-2 Certificates at
the Respective Percentages of the Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
March 15, 2000.......... 100 100 100 100 100
March 15, 2001.......... 100 100 100 100 100
March 15, 2002.......... 100 100 100 100 100
March 15, 2003.......... 100 100 100 100 100
March 15, 2004.......... 100 100 100 100 100
March 15, 2005.......... 100 100 100 100 0
March 15, 2006.......... 100 100 100 0 0
March 15, 2007.......... 100 100 0 0 0
March 15, 2008.......... 100 100 0 0 0
March 15, 2009.......... 100 0 0 0 0
March 15, 2010.......... 100 0 0 0 0
March 15, 2011.......... 100 0 0 0 0
March 15, 2012.......... 0 0 0 0 0
Weighted Average Life
(1) (years)............ 12.1 9.3 7.5 6.2 5.2
</TABLE>
- --------
(1) The weighted average life of a Class M-2 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class M-2 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class M-2 Certificate.
Percentage of the Original Principal Balance of the Class B-1
Certificates at the Respective Percentages of the
Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
March 15, 2000.......... 100 100 100 100 100
March 15, 2001.......... 100 100 100 100 100
March 15, 2002.......... 100 100 100 100 100
March 15, 2003.......... 100 58 45 34 26
March 15, 2004.......... 65 22 4 0 0
March 15, 2005.......... 35 0 0 0 0
March 15, 2006.......... 10 0 0 0 0
March 15, 2007.......... 0 0 0 0 0
Weighted Average Life
(1) (years)............ 5.6 4.3 4.0 3.8 3.7
</TABLE>
- --------
(1) The weighted average life of a Class B-1 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class B-1 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class B-1 Certificate.
S-44
<PAGE>
Percentage of the Original Principal Balance of the Class B-2A
Certificates at the Respective Percentages of the
Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
March 15, 2000.......... 0 2 4 6 8
March 15, 2001.......... 0 0 0 0 0
Weighted Average Life
(1) (years)............ 0.5 0.5 0.5 0.5 0.5
</TABLE>
- --------
(1) The weighted average life of a Class B-2A Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class B-2A Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class B-2A Certificate.
Percentage of the Original Principal Balance of the Class B-2
Certificates at the Respective Percentages of the
Prepayment Assumption Set Forth Below:
<TABLE>
<CAPTION>
Date Scenario I Scenario II Scenario III Scenario IV Scenario V
- ---- ---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Initial Percentage...... 100% 100% 100% 100% 100%
March 15, 2000.......... 100 100 100 100 100
March 15, 2001.......... 100 100 100 100 100
March 15, 2002.......... 100 100 100 100 100
March 15, 2003.......... 100 100 100 100 100
March 15, 2004.......... 100 100 100 85 85
March 15, 2005.......... 100 87 52 53 0
March 15, 2006.......... 100 45 36 0 0
March 15, 2007.......... 79 21 0 0 0
March 15, 2008.......... 46 18 0 0 0
March 15, 2009.......... 24 0 0 0 0
March 15, 2010.......... 21 0 0 0 0
March 15, 2011.......... 19 0 0 0 0
March 15, 2012.......... 0 0 0 0 0
Weighted Average Life
(1) (years)............ 9.4 7.2 6.4 5.8 5.2
</TABLE>
- --------
(1) The weighted average life of a Class B-2 Certificate is determined by (i)
multiplying the amount of cash distributions in reduction of the principal
balance of such Certificate by the number of years from the date of
issuance of such Class B-2 Certificate to the stated Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial principal
balance of such Class B-2 Certificate.
S-45
<PAGE>
GREEN TREE FINANCIAL CORPORATION
General
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under the heading
"Green Tree Financial Corporation."
The Company is a Delaware corporation which, as of December 31, 1997, had
stockholders' equity of approximately $1,332,000,000. The Company purchases,
pools, sells and services conditional sales contracts for manufactured homes
and other consumer installment sales contracts, as well as home equity loans.
The Company is the largest servicer of government-insured manufactured housing
contracts and conventional manufactured housing contracts in the United States.
Servicing functions are performed through Green Tree Financial Servicing
Corporation, a wholly owned subsidiary of the Company. Through its principal
offices in St. Paul, Minnesota, and service centers throughout the United
States, the Company serves all 50 states. The Company began financing home
equity loans in January 1996. The Company also purchases, pools and services
installment sales contracts for various consumer products. The Company's
principal executive offices are located at 1100 Landmark Towers, 345 St. Peter
Street, St. Paul, Minnesota 55102-1639 (telephone (651) 293-3400). The
Company's quarterly and annual reports, which are incorporated by reference in
this Prospectus Supplement and in the Prospectus, are available from the
Company upon written request made to the Company.
Ratio of Earnings to Fixed Charges for the Company
Set forth below are the Company's ratios of earnings to fixed charges for the
past five years ended December 31, 1997 and the nine months ended September 30,
1998. For the purposes of compiling these ratios, earnings consist of earnings
before income taxes plus fixed charges. Fixed charges consist of interest
expense and the interest portion of rent expense.
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, Sept 30,
------------------------ -----------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- -----------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges........ 4.81 7.98 7.90 5.44 3.94 (.53)*
</TABLE>
- --------
* On July 6, 1998, Conseco, Inc. announced a second-quarter charge of $498
million, net of income taxes, related to the acquisition of Green Tree. The
charges are directly related to (1) $148 million in merger-related costs,
and (2) a $350 million non-cash supplemental reserve against the valuation
of Green Tree's interest-only securities and servicing rights. As a result,
the ratio of earnings (losses) to fixed charges was less than 1.00 for the
nine months ended September 30, 1998 and earnings were inadequate to cover
fixed charges for such period. The amount of the coverage deficiency for
such period was $251,600,000.
Recent Developments
The Company has been served with various lawsuits in the United States
District Court for the District of Minnesota. These lawsuits were filed by
certain stockholders of the Company as purported class actions on behalf of
persons or entities who purchased common stock of the Company during the
alleged class periods. In addition to the Company, certain current and former
officers and directors of the Company are named as defendants in one or more of
the lawsuits. The Company and the other defendants intend to seek consolidation
of each of the lawsuits in the United States District Court for the District of
Minnesota. Plaintiffs in the lawsuits assert claims under Sections 10(b) and
20(a) of the Securities Exchange Act of 1934. In each case, plaintiffs allege
that the Company and the other defendants violated federal securities laws by,
among other things, making false and misleading statements about the current
state and future prospects of the Company (particularly with respect to
prepayment assumptions and performance of certain of the Company's loan
portfolios) which allegedly rendered the Company's financial statements false
and misleading. The Company believes that the lawsuits are without merit and
intends to defend such lawsuits vigorously.
S-46
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under "Description of
the Certificates."
The Certificates will be issued pursuant to the Agreement between the
Company, as Seller and Servicer, and the Trustee. A copy of the execution form
of the Agreement will be filed in a Current Report on Form 8-K with the
Securities and Exchange Commission after the initial issuance of the
Certificates. The following summary describes the material provisions of the
Agreement, reference to which is hereby made for a complete recital of its
terms.
General
The Certificates will be issued in fully registered, certificated form only
in minimum denominations of $1,000 or any integral multiple in excess thereof.
The Certificates initially will be represented by certificates registered in
the name of Cede & Co. as the nominee of DTC, and will only be available in the
form of book-entries on the records of DTC (in the United States), or CEDEL or
Euroclear (as defined herein) (in Europe), and participating members thereof.
See "--Registration of the Certificates" below. The Trust consists primarily of
the Loans and the rights, benefits, obligations and proceeds arising therefrom
or in connection therewith, including liens on the related real estate, amounts
held in the Certificate Account and the Class B-2 Limited Guaranty of the
Company for the benefit of the Class B-2 Certificateholders.
Distributions on the Certificates will be made by the Paying Agent (which
shall initially be the Trustee) on each Payment Date to persons in whose names
the Certificates are registered as of the Business Day immediately preceding
such Payment Date (the "Record Date"). See "--Registration of the Certificates"
below. The first Payment Date for the Certificates will be in April 1999.
Payments will be made by check mailed to such Certificateholder at the address
appearing on the Certificate Register (except that a Certificateholder who
holds an aggregate Percentage Interest of at least 5% of a Class of
Certificates may request payment in respect of its Certificates of such Class
by wire transfer). Final payments will be made only upon tender of the
Certificates to the Trustee for cancellation.
Conveyance of Loans
On the Closing Date, the Company will establish the Trust and transfer,
assign, set over and otherwise convey to the Trust all right, title and
interest of the Company in the Initial and Additional Loans, including all
principal and interest received on or with respect to such Loans (other than
receipts of principal and interest due on such Loans on or before the Cut-off
Date). The Agreement permits the Trust to purchase up to approximately
$300,000,000 aggregate principal balance of Subsequent Loans on one or more
closing dates until June 14, 1999 (each, a "Subsequent Transfer Date"). See "--
Conveyance of Subsequent Loans and Pre-Funding Account" below.
The Loans will be described on a list delivered to the Trustee and certified
by a duly authorized officer of the Company. Such list will include the amount
of monthly payments due on each Loan as of the date of its transfer to the
Trust, the Loan Rate on each Loan and the maturity date of each Loan. The list
will be attached as an exhibit to the Agreement and will be available for
inspection by any Certificateholder at the principal office of the Company.
Prior to the conveyance of the Loans to the Trust, the Company will have
completed a review of all the Loan files, confirming the accuracy of each item
on the list of Loans delivered to the Trustee. Any Loan discovered not to agree
with such list in a manner that is materially adverse to the interests of the
Certificateholders will be repurchased by the Company, or, if the discrepancy
relates to the unpaid principal balance of a Loan, the Company may deposit cash
in the Certificate Account in an amount sufficient to offset such discrepancy.
S-47
<PAGE>
The Trustee will maintain possession of the Loans and any other documents
contained in the Loan files. Uniform Commercial Code financing statements will
be filed in Minnesota, reflecting the conveyance and assignment of the Loans to
the Trustee, and the Company's accounting records and computer systems will
also reflect such conveyance and assignment.
Dorsey & Whitney LLP, counsel to the Company, will render an opinion to the
Trustee that the transfer of the Loans from the Company to the Trust would, in
the event the Company became a debtor under the United States Bankruptcy Code,
be treated as a true sale and not as a pledge to secure borrowings. If,
however, the transfer of the Loans from the Company to the Trust were treated
as a pledge to secure borrowings by the Company, the distribution of proceeds
of the Loans to the Trust might be subject to the automatic stay provisions of
the United States Bankruptcy Code, which would delay the distribution of such
proceeds for an uncertain period of time. In addition, a bankruptcy trustee
would have the power to sell the Loans if the proceeds of such sale could
satisfy the amount of the debt deemed owed by the Company, or the bankruptcy
trustee could substitute other collateral in lieu of the Loans to secure such
debt, or such debt could be subject to adjustment by the bankruptcy trustee if
the Company were to file for reorganization under Chapter 11 of the United
States Bankruptcy Code.
The Company will make certain representations and warranties in the Agreement
with respect to each Loan, including that: (a) for each Loan other than the
Subsequent Loans, as of the applicable Cut-off Date, the most recent scheduled
payment was made or was not delinquent more than 59 days; (b) for each
Subsequent Loan, as of the respective Subsequent Cut-off Date, the most recent
scheduled payment was made or was not delinquent more than 59 days; (c) no
provision of a Loan has been waived, altered or modified in any respect, except
by instruments or documents included in the Loan file and reflected on the list
of Loans delivered to the Trustee; (d) each Loan is a legal, valid and binding
obligation of the Obligor and is enforceable in accordance with its terms
(except as may be limited by laws affecting creditors' rights generally); (e)
no Loan is subject to any right of rescission, set-off, counterclaim or
defense; (f) each Loan was originated by a home equity lender in the ordinary
course of its business or was originated by the Company directly; (g) no Loan
was originated in or is subject to the laws of any jurisdiction whose laws
would make the transfer of the Loan or an interest therein pursuant to the
Agreement or the Certificates unlawful; (h) each Loan complies with and was
originated in accordance with all requirements of law; (i) no Loan has been
satisfied, subordinated to a lower lien ranking than its original position or
rescinded; (j) each Loan creates a valid and perfected lien on the related real
estate; (k) all parties to each Loan had full legal capacity to execute such
Loan; (l) no Loan has been sold, conveyed and assigned or pledged to any other
person and the Company has good and marketable title to each Loan free and
clear of any encumbrance, equity, lien, pledge, charge, claim or security
interest, and is the sole owner and has full right to transfer such Loan to the
Trustee; (m) as of the applicable Cut-off Date there was no default, breach,
violation or event permitting acceleration under any Loan (except for payment
delinquencies permitted by clauses (a) and (b) above), no event that with
notice and the expiration of any grace or cure period would constitute a
default, breach, violation or event permitting acceleration under such Loan,
and the Company has not waived any of the foregoing; (n) each Loan is a fully-
amortizing loan and provides for level monthly payments based on its applicable
Loan Rate over the term of such Loan, except, in the case of a Balloon Loan,
for the final monthly payment; (o) each Loan contains customary and enforceable
provisions such as to render the rights and remedies of the holder thereof
adequate for realization against the collateral; (p) the description of each
Loan set forth in the list delivered to the Trustee is true and correct; (q)
there is only one original of each Loan; (r) each Loan was originated or
purchased in accordance with the Company's then-current underwriting
guidelines; (s) each Loan is a "qualified mortgage" under section 860G(a)(3) of
the Internal Revenue Code of 1986, as amended; and (t) the CLTV for each Loan
is not greater than 100%.
The Company will also make certain representations and warranties with
respect to the Loans in the aggregate, including that (i) each Loan (other than
the Adjustable Rate Loans) has a contractual rate of interest of at least
4.75%; (ii) no Loan had a remaining term to maturity at origination of more
than 360 months; (iii) no more than 1% of the Loans, by principal balance as of
the Cut-off Date, were secured by properties located in an area with the same
zip code; (iv) no more than 5.0% of the Loans, by principal balance as of the
Cut-off Date, were originated by any one lender; and (v) no adverse selection
procedures were employed in selecting
S-48
<PAGE>
the Loans from the Company's portfolio. The Company will make certain
additional representations and warranties with respect to the Subsequent Loans.
See "--Conveyance of Subsequent Loans and Pre-Funding Account" below.
Under the terms of the Agreement, and subject to the Company's option to
effect a substitution as described in the next paragraph, the Company has
agreed to repurchase, at the Repurchase Price, any Loan that is materially and
adversely affected by a breach of a representation and warranty with respect to
such Loan made in the Agreement if such breach has not been cured within 90
days of the day it was or should have been discovered by the Servicer or the
Trustee. The "Repurchase Price," with respect to any Loan to be so repurchased
or with respect to a Liquidated Loan, means the outstanding principal balance
of such Loan (without giving effect to any Advances made by the Servicer or the
Trustee), plus interest on such Loan at the weighted average of the Pass-
Through Rates of the Certificates from the end of the Due Period with respect
to which the Obligor last made a scheduled payment (without giving effect to
any Advances made by the Servicer or the Trustee) through the date of such
repurchase or liquidation. This repurchase obligation constitutes the sole
remedy available to the Trust and the Certificateholders for a breach of a
representation or warranty under the Agreement with respect to the Loans (but
not with respect to any other breach by the Company of its obligations under
the Agreement).
In lieu of repurchasing a Loan as specified in the preceding paragraph,
during the two-year period following the Closing Date, the Company may, at its
option, substitute an Eligible Substitute Loan (as defined below) for the Loan
that it is otherwise obligated to repurchase (referred to herein as the
"Replaced Loan"). An "Eligible Substitute Loan" is a Loan that satisfies, as of
the date of its substitution, the representations and warranties specified in
Article III of the Agreement, has a Scheduled Principal Balance that is not
greater than the Scheduled Principal Balance of the Replaced Loan, has a Loan
Rate that is at least equal to the Loan Rate of the Replaced Loan and has a
remaining term to scheduled maturity that is not greater than the remaining
term to scheduled maturity of the Replaced Loan. The Company will be required
to deposit in the Certificate Account cash in the amount, if any, by which the
Scheduled Principal Balance of the Replaced Loan exceeds the Scheduled
Principal Balance of the Loan being substituted. Such deposit will be deemed to
be a Partial Principal Prepayment.
Under the Agreement, the Company may, at its option, substitute new loans for
Loans which are prepaid in full prior to June 1, 1999. Any such substitute
loans shall constitute Eligible Substitute Loans and must be substituted prior
to the Determination Date immediately following the calendar month in which the
prepayment was received by the Servicer. In the event the aggregate amount of
principal received in respect of Loans prepaid in full in a given calendar
month exceeds the aggregate of the Scheduled Principal Balances of Eligible
Substitute Loans substituted therefor, such excess shall be distributed to
Certificateholders on the related Payment Date as a prepayment of principal.
Notwithstanding the foregoing, there is no assurance that the Company will opt
to make any such substitutions nor, should it desire to exercise such option,
that Eligible Substitute Loans will be available therefor.
Pursuant to the Agreement, the Servicer will service and administer the Loans
conveyed and assigned to the Trustee as more fully set forth below.
Conveyance of Subsequent Loans and Pre-Funding Account
An account (the "Pre-Funding Account") will be established by the Trustee and
funded by the Company with up to approximately $300,000,000 (the "Pre-Funded
Amount") on the Closing Date to provide the Trust with sufficient funds to
purchase Subsequent Loans. The Pre-Funding Account will be used to purchase
Subsequent Loans during the period from the Closing Date until the earliest of
(i) the date on which the amount on deposit in the Pre-Funding Account is less
than $10,000, (ii) June 14, 1999 or (iii) the date on which an Event of
Termination occurs under the Agreement (the "Funding Period"). The Pre-Funded
Amount will be reduced during the Funding Period by the amount used to purchase
Subsequent Loans in accordance with the Agreement.
S-49
<PAGE>
Under the Agreement, the Trust will be obligated to purchase Subsequent Loans
from the Company during the Funding Period, subject to the availability
thereof. In connection with the purchase of Subsequent Loans on such dates of
transfer (the "Subsequent Transfer Dates"), the Trust will be required to pay
to the Company from amounts on deposit in the Pre-Funding Account a cash
purchase price of 100% of the principal balance thereof. The Company will
designate the Subsequent Transfer Date as the cut-off date (the "Subsequent
Cut-off Date") with respect to the related Subsequent Loans purchased on such
date. The amount paid from the Pre-Funding Account on each Subsequent Transfer
Date will not include accrued interest on the related Subsequent Loans.
Following each Subsequent Transfer Date, the aggregate principal balance of the
Subsequent Loans will increase by an amount equal to the aggregate principal
balance of the Loans so purchased and the amount in the Pre-Funding Account
will decrease accordingly.
Any Pre-Funded Amount remaining after the end of the Funding Period will be
applied on the next Payment Date to prepay principal on the Class A-1A ARM,
Class A-1B ARM, and Class A-1 Certificates. Any amounts remaining which had
been allocated to the purchase of Subsequent Adjustable Rate Loans will be paid
to the Class A-1A ARM and Class A-1B ARM Certificateholders and any amounts
remaining which had been allocated to the purchase of Subsequent Fixed-Rate
Loans will be paid to the Class A-1 Certificateholders. Although no assurance
can be given, the Company anticipates that the principal amount of the related
Subsequent Loans purchased by the Trust will require the application of
substantially all of the related Pre-Funded Amount and that there should be no
material amount of principal prepaid to the Class A-1A ARM, Class A-1B ARM or
Class A-1 Certificateholders from the Pre-Funding Account. However, it is
unlikely that the Company will be able to deliver Subsequent Loans with an
aggregate principal balance identical to the remaining Pre-Funded Amount.
Any conveyance of Subsequent Loans on a Subsequent Transfer Date is subject
to certain conditions including, but not limited to: (a) each Subsequent Loan
must satisfy the representations and warranties specified in the related
subsequent transfer instrument and the Agreement; (b) the Company may not
select Subsequent Loans in a manner that it believes is adverse to the
interests of the Certificateholders; (c) as of the respective Subsequent Cut-
off Date the Subsequent Loans must satisfy the following criteria: (i) no
Subsequent Loan may be more than 59 days contractually delinquent as of the
related Subsequent Cut-off Date; (ii) the remaining stated term to maturity of
each Subsequent Loan may not exceed 360 months; (iii) each Subsequent Loan must
have been underwritten in accordance with the Company's standard underwriting
criteria; (iv) as a result of the purchase of the Subsequent Loans, the
weighted average loan to value ratio of the Loan Pool will not be more than 200
basis points more than such ratio with respect to the Initial Loans; (v) as a
result of the purchase of the Subsequent Loans, the ratings of the Class A
Certificates by S&P and Fitch will not be reduced, withdrawn or qualified; and
(vi) an independent accountant will provide a letter stating whether the
characteristics of the Subsequent Loans conform to the characteristics
described herein.
Payments on Loans
The Servicer, on behalf of the Trust, will establish and maintain a
Certificate Account in an "Eligible Account" (as defined below) at a depository
institution (initially U.S. Bank National Association, Minneapolis, Minnesota)
with trust powers organized under the laws of the United States or any state,
the deposits of which are insured to the full extent permitted by law by the
Federal Deposit Insurance Corporation (the "FDIC"), whose short-term deposits
have been rated A-1 by S&P and F-1 by Fitch (if rated by Fitch) or whose
unsecured long-term debt has been rated in one of the two highest rating
categories by S&P and Fitch (if rated by Fitch), and which is subject to
supervision and examination by federal or state authorities (an "Eligible
Institution"). "Eligible Account" means, at any time, an account which is any
of the following: (i) an account maintained with an Eligible Institution; (ii)
an account or accounts the deposits in which are fully insured by either the
Bank Insurance Fund or the Savings Association Insurance Fund of the FDIC;
(iii) a segregated trust account maintained with the corporate trust department
of a federal or state chartered depository institution or trust company with
trust powers and acting in its fiduciary capacity for the benefit of the
Trustee, which depository institution or trust company has capital and surplus
of not less than $50,000,000; or (iv) an account that will
S-50
<PAGE>
not cause S&P or Fitch to downgrade or withdraw its then-current rating
assigned to the Certificates, as evidenced in writing by S&P and Fitch. The
Servicer may authorize the Trustee to invest the funds in the Certificate
Account in Eligible Investments (as defined in the Agreement) that will mature
not later than the Business Day preceding the applicable monthly Payment Date.
Such Eligible Investments include, among other investments, obligations of the
United States or of any agency thereof backed by the full faith and credit of
the United States, federal funds, certificates of deposit, time deposits and
bankers acceptances sold by eligible commercial banks; any other demand or time
deposit or certificate of deposit fully insured by the FDIC; investments in
certain money-market funds; certain repurchase agreements of United States
government securities with eligible commercial banks; securities bearing
interest or sold at a discount issued by a corporation which has a credit
rating of at least AA from S&P and Fitch (if rated by Fitch) not in excess of
10% of amounts in the Certificate Account at the time of such investment; and
commercial paper assigned a rating of at least A-1+ by S&P and at least F-1+ by
Fitch (if rated by Fitch). Any losses on such investments will be deducted from
other investment earnings or from other funds in the Certificate Account.
All receipts by the Servicer of payments with respect to the Loans, including
Principal Prepayments and advance payments by Obligors not constituting
Principal Prepayments ("Advance Payments"), shall be paid into the Certificate
Account no later than one Business Day following receipt thereof, except
amounts received as extension fees or assumption fees not allocated to regular
installments due on Loans, which are retained by the Servicer as part of its
servicing fees and are not paid into the Certificate Account, and except for
certain proceeds from Liquidated Loans which are used to reimburse the Servicer
for customary out-of-pocket liquidation expenses. See "--Servicing Compensation
and Payment of Expenses" below. In addition, any Advances by the Servicer or
the Trustee as described under "--Advances" below, and amounts paid by the
Company for Loans repurchased, or upon substitution for a Loan otherwise
required to be repurchased, as a result of a breach of representations or
warranties under the Agreement, as described under "--Conveyance of Loans"
above, shall be paid into the Certificate Account.
On the second Business Day preceding each Payment Date (the "Determination
Date"), the Servicer will determine the Amount Available in the Certificate
Account for that Payment Date and the amount of funds necessary to make all
payments to be made on that Payment Date from the Certificate Account. Not
later than one Business Day after the Determination Date, the Company will
deposit in the Certificate Account the Repurchase Price of any Loans required
to be repurchased on such Payment Date, or any amounts required to be deposited
upon substitution for any Loan otherwise required to be repurchased on such
Payment Date, as a result of a breach of representations and warranties under
the Agreement.
On each Payment Date the Trustee will withdraw the Amount Available from the
Certificate Account and make the following payments, in the following order of
priority:
(a) if neither the Company nor any wholly owned subsidiary of the
Company is the Servicer, to pay the Monthly Servicing Fee to the Servicer;
(b) to pay interest and principal on the Certificates, in the manner
and the order of priority described below;
(c) if the Company or any wholly owned subsidiary of the Company is
the Servicer, to pay the Monthly Servicing Fee to the Servicer;
(d) to pay any Class B-2A Additional Principal Distribution Amount, as
described under "--Distributions on Certificates--Class B-2A Principal"
below;
(e) to reimburse the Servicer or the Trustee, as applicable, for any
unreimbursed Advances with respect to the Loans made in respect of current
or prior Payment Dates;
(f) to reimburse the holder of the Class C Certificates for expenses
incurred by and reimbursable to it with respect to taxes or charges imposed
upon the Trust as a REMIC or otherwise;
(g) to reimburse the Company for any prior unreimbursed Class B-2
Guaranty Payments;
S-51
<PAGE>
(h) to pay the Class B-3I Distribution Amount on the Class B-3I
Certificates; and
(i) to pay any remaining amounts to the holder of the Class C
Certificates.
The "Scheduled Principal Balance" of a Loan with respect to any Payment Date
is its principal balance as of the scheduled payment date (the "Due Date") in
the calendar month preceding such Payment Date as specified in its amortization
schedule, after giving effect to any previous partial Principal Prepayments and
to the scheduled payment due on such Due Date, but without giving effect to any
delinquency in payment or adjustments due to bankruptcy or similar proceedings.
The "Pool Scheduled Principal Balance" as of any Payment Date is the aggregate
of the Scheduled Principal Balances of Loans comprising the Loan Pool that were
outstanding during the preceding Due Period. A "Liquidated Loan" is a defaulted
Loan as to which all amounts that the Servicer expects to recover on account of
such Loan have been received.
Distributions on Certificates
On each Payment Date, distributions on the Certificates in respect of the
Amount Available will be made to the holders of the Class A Certificates, the
Class M Certificates and the Class B Certificates, in the manner described
below. Distributions of interest and principal on the Certificates will be made
primarily from amounts available in respect of the Loans.
Certificateholders will be entitled to receive on each Payment Date
commencing in April 1999, to the extent that the Amount Available (as defined
herein) in the Certificate Account (together with, in the case of the Class B-2
Certificates, the Class B-2 Guaranty Payment, as described below) is sufficient
therefor, distributions allocable to interest and principal, as described
herein. The rights of the Class M and Class B Certificateholders to receive
distributions in respect of the Amount Available are subordinated to the rights
of the Class A Certificateholders; the rights of the Class M-2 and Class B
Certificateholders to receive such distributions are further subordinated to
the rights of the Class M-1 Certificateholders; the rights of the Class B
Certificateholders to receive such distributions are further subordinated to
the rights of the Class M-2 Certificateholders; the rights of the Class B-2A
and Class B-2 Certificateholders to receive such distributions are further
subordinated to the rights of the Class B-1 Certificateholders; and the rights
of the Class B-2 Certificateholders to receive such distributions are further
subordinated to the rights of the Class B-2A Certificateholders. Distributions
will be made on each Payment Date to holders of record on the related Record
Date, except that the final distribution in respect of the Certificates will
only be made upon presentation and surrender of the Certificates at the office
or agency appointed by the Trustee for that purpose in Minneapolis or St. Paul,
Minnesota.
See "--Payments on Loans" above for a detailed description of the amounts on
deposit in the Certificate Account that will constitute the Amount Available on
each Payment Date. The Amount Available will consist primarily of payments made
on or in respect of the Loans and will include amounts payable, subject to the
subordination described herein, to the Servicer (so long as the Company or any
wholly owned subsidiary of the Company is the Servicer) as the Monthly
Servicing Fee, and to the Class B-3I and Class C Certificateholders.
Interest on the Class A, Class M-1, Class M-2 and Class B-1 Certificates
Interest will be distributable first to each Class of Class A Certificates
concurrently, then to the Class M-1 Certificates, then to the Class M-2
Certificates and then to the Class B-1 Certificates. Interest on the
outstanding Class A Principal Balance (or, in the case of the Class A-6 IO
Certificates, on the Notional Principal Amount), Class M-1 Adjusted Principal
Balance, Class M-2 Adjusted Principal Balance and Class B-1 Adjusted Principal
Balance, as applicable, will accrue at the related Pass-Through Rate from March
18, 1999, or from the most recent Payment Date on which interest has been paid,
to but excluding the following Payment Date. Interest on each Class of Class A
Certificates, other than the Class A-1A ARM and Class A-1B ARM Certificates,
will be computed on the basis of a 360-day year of twelve 30-day months.
Interest on the Class A-1A ARM and Class A-1B ARM Certificates will be computed
on the basis of actual days elapsed in a 360-day year. The "Principal Balance"
of a Class of Certificates (other than the Class A-6 IO Certificates, which has
no Principal Balance)
S-52
<PAGE>
as of any Payment Date is the Original Principal Balance of such Class less all
amounts previously distributed in respect of principal of such Class. The
"Class A Principal Balance" as of any Payment Date is the sum of the Class A-1A
ARM Principal Balance, the Class A-1B ARM Principal Balance, the Class A-1
Principal Balance, the Class A-2 Principal Balance, the Class A-3 Principal
Balance, the Class A-4 Principal Balance and the Class A-5 Principal Balance.
The "Class M Principal Balance" as of any Payment Date is the sum of the Class
M-1 Principal Balance and the Class M-2 Principal Balance. The "Class M-1
Adjusted Principal Balance" as of any Payment Date is the Class M-1 Principal
Balance less any Class M-1 Liquidation Loss Amount (described below under "--
Losses on Liquidated Loans"). The "Class M-2 Adjusted Principal Balance" as of
any Payment Date is the Class M-2 Principal Balance less any Class M-2
Liquidation Loss Amount (described below under "--Losses on Liquidated Loans").
The "Class B Principal Balance" as of any Payment Date is the sum of the Class
B-1 Principal Balance, the Class B-2A Principal Balance and the Class B-2
Principal Balance. The "Class B-1 Adjusted Principal Balance" as of any Payment
Date is the Class B-1 Principal Balance less any Class B-1 Liquidation Loss
Amount (described below under "--Losses on Liquidated Loans").
The Pass-Through Rates for the Class A (other than the Class A-1A ARM and
Class A-1B ARM), Class M, Class B-1 and Class B-2A Certificates are set forth
on the cover of this Prospectus Supplement.
The "Class A-1A ARM Pass-Through Rate" is a floating rate equal to the lesser
of one-month LIBOR plus the Class A-1A Pass-Through Margin or the Available
Funds Pass-Through Rate, but in no case more than 14%. The "Class A-1A Pass-
Through Margin" will equal 0.26% per annum on each Payment Date on which the
Pool Scheduled Principal Balance is 10% or more of the Cut-off Date Pool
Principal Balance, and 0.52% per annum on each Payment Date on which the Pool
Scheduled Principal Balance is less than 10% of the Cut-off Date Pool Principal
Balance. The "Class A-1B ARM Pass-Through Rate" is a floating rate equal to the
lesser of one-month LIBOR plus the "Class A-1B Pass-Through Margin" or the
Available Funds Pass-Through Rate, but in no case more than 14%. The "Class A-
1B Pass-Through Margin" will equal 0.28% per annum on each Payment Date on
which the Pool Scheduled Principal Balance is 10% or more of the Cut-off Date
Pool Principal Balance, and 0.56% per annum on each Payment Date on which the
Pool Scheduled Principal Balance is less than 10% of the Cut-off Date Pool
Principal Balance. The "Available Funds Pass-Through Rate" for any Payment Date
will be a rate per annum equal to the weighted average of the Expense Adjusted
Loan Rates on the then outstanding Adjustable Rate Loans. The "Expense Adjusted
Loan Rate" on any Adjustable Rate Loan is equal to the then applicable Loan
Rate thereon, minus the Expense Fee Rate. The "Expense Fee Rate" is 0.50%.
"One-month LIBOR" with respect to any monthly interest period will equal the
offered rate for United States dollar deposits for one month that appears on
Telerate Page 3750 as of 11:00 A.M., London time, on the second LIBOR business
day prior to such monthly interest period. For a description of the method used
to calculate one-month LIBOR, see "--Calculation of One-Month LIBOR" below. In
the event that, on any Payment Date, the Available Funds Pass-Through Rate is
less than (i) one-month LIBOR plus the Class A-1A Pass-Through Margin (but in
no event more than 14%) or (ii) one-month LIBOR plus the Class A-1B Pass-
Through Margin (but in no event more than 14%), then interest on the Class A-1A
ARM Principal Balance or the Class A-1B ARM Principal Balance, as applicable,
computed at a rate equal to such difference, will be payable from the Amount
Available after payment of all interest and principal due on the Class B-2
Certificates but prior to payment of the Monthly Servicing Fee to Green Tree
and prior to the payment of any Class B-2A Additional Principal Distribution
Amount.
Interest will be calculated on the Class A-6 IO Certificates on each Payment
Date based on the Notional Principal Amount, which for the first 24 Payment
Dates is equal to $120,000,000 (or the Pool Scheduled Principal Balance for
such Payment Date, if less), and will thereafter equal zero. The Notional
Principal Amount provides a basis for calculating interest payments only, and
does not represent the right to receive any distributions of principal.
In the event that, on a particular Payment Date, the Amount Available in the
Certificate Account is not sufficient to make a full distribution of interest
to the holders of a Class of Class A Certificates, Class M-1 Certificates,
Class M-2 Certificates or Class B-1 Certificates, after payment of interest on
each Class of Certificates that is senior to such Class of Certificates (the
Class A Certificates being treated as a single Class
S-53
<PAGE>
for this purpose), the amount of interest to be distributed in respect of such
Class will be allocated among the outstanding Certificates of such Class pro
rata in accordance with their respective entitlements to interest, and the
amount of the shortfall will be carried forward and added to the amount such
holders will be entitled to receive on the next Payment Date. Any such amount
so carried forward will bear interest at the applicable Pass-Through Rate, to
the extent legally permissible.
Principal on the Class A, Class M-1, Class M-2 and Class B-1 Certificates
The Class A (other than the Class A-6 IO Certificates, which will receive no
distributions of principal), Class M-1, Class M-2 and Class B-1 Certificates
will be entitled to receive on each Payment Date distributions of principal in
the order of priority set forth and as otherwise described below, to the extent
of the Amount Available in the Certificate Account after payment of all
interest then accrued on the Class A Principal Balance, Class A-6 IO Notional
Principal Amount, Class M-1 Adjusted Principal Balance, Class M-2 Adjusted
Principal Balance and Class B-1 Adjusted Principal Balance.
Holders of the Class A-1A ARM Certificates and the Class A-1B ARM
Certificates will be entitled to receive, as payments of principal, an amount
equal to the Group I ARM Formula Principal Distribution Amount and the Group II
ARM Formula Principal Distribution Amount, respectively. The "Group I ARM
Formula Principal Distribution Amount" on or before the Payment Date on which
the Class A-1A ARM Certificates have been paid in full will generally be equal
to the lesser of (A) the Class A-1A ARM Principal Balance or (B) the sum of the
following:
(i) all scheduled payments of principal due on each outstanding Group
I Adjustable Rate Loan during the related Due Period;
(ii) the Scheduled Principal Balance of each Group I Adjustable Rate
Loan which, during the related Due Period, was purchased by the Company
pursuant to the Agreement on account of certain breaches of its
representations and warranties;
(iii) the Scheduled Principal Balance of each Group I Adjustable Rate
Loan that became a Liquidated Loan during the related Due Period;
(iv) all partial Principal Prepayments applied and Principal
Prepayments in Full received on each Group I Adjustable Rate Loan during
the related Due Period; and
(v) on any Payment Date which is on or after the Payment Date on which
the Class A-1, Class A-2, Class A-3, Class A-4 and Class A-5 Certificates
have been paid in full, a pro rata portion (based on the Class A-1A ARM
Principal Balance versus the Class A-1B ARM Principal Balance) of (a) the
Senior Percentage times the sum of the amounts described in clause (A) of
the definition of the Formula Principal Distribution Amount less (b) the
amount, if any, to be distributed in payment of principal on the Class A-1,
Class A-2, Class A-3, Class A-4 and Class A-5 Certificates on such Payment
Date.
The "Group II ARM Formula Principal Distribution Amount" on or before the
Payment Date on which the Class A-1B ARM Certificates have been paid in full
will generally be equal to the lesser of (A) the Class A-1B ARM Principal
Balance or (B) the sum of the following:
(i) all scheduled payments of principal due on each outstanding Group
II Adjustable Rate Loan during the related Due Period;
(ii) the Scheduled Principal Balance of each Group II Adjustable Rate
Loan which, during the related Due Period, was purchased by the Company
pursuant to the Agreement on account of certain breaches of its
representations and warranties;
(iii) the Scheduled Principal Balance of each Group II Adjustable Rate
Loan that became a Liquidated Loan during the related Due Period;
(iv) all partial Principal Prepayments applied and Principal
Prepayments in Full received on each Group II Adjustable Rate Loan during
the related Due Period; and
S-54
<PAGE>
(v) on any Payment Date which is on or after the Payment Date on which
the Class A-1, Class A-2, Class A-3, Class A-4 and Class A-5 Certificates
have been paid in full, a pro rata portion (based on the Class A-1B ARM
Principal Balance versus the Class A-1A ARM Principal Balance) of (a) the
Senior Percentage times the sum of the amounts described in clause (A) of
the definition of the Formula Principal Distribution Amount less (b) the
amount, if any, to be distributed in payment of principal on the Class A-1,
Class A-2, Class A-3, Class A-4 and Class A-5 Certificates on such Payment
Date.
The Class A-6 IO Certificates are interest-only Certificates and are not
entitled to receive distributions of principal.
Holders of the Class A Certificates (other than the Class A-1A ARM
Certificates, the Class A-1B ARM Certificates and the Class A-6 IO
Certificates), the Class M-1 Certificates, the Class M-2 Certificates and the
Class B-1 Certificates will be entitled to receive, as payments of principal,
an amount equal to the Senior Percentage or the Class B Percentage, as
applicable, of the "Formula Principal Distribution Amount," which is
(A) the sum of
(i) all scheduled payments of principal due on each outstanding Loan
during the related Due Period,
(ii) the Scheduled Principal Balance of each Loan which, during the
related Due Period, was purchased by the Company pursuant to the
Agreement on account of certain breaches of its representations and
warranties,
(iii) all partial Principal Prepayments applied and all Principal
Prepayments in Full received during the related Due Period in respect
of Loans,
(iv) the Scheduled Principal Balance of each Loan that became a
Liquidated Loan during the related Due Period and
(v) any amount described in clauses (i) through (iv) above that was
not previously distributed because of an insufficient amount of funds
available in the Certificate Account if (a) the Payment Date occurs on
or after the Payment Date on which the Class B-2 Principal Balance has
been reduced to zero, or (b) such amount was not covered by a Class B-2
Guaranty Payment and corresponding reduction in the Class B-2 Principal
Balance, minus
(B) the sum of those portions of the Group I ARM Formula Principal
Distribution Amount and the Group II ARM Formula Principal Distribution
Amount described in clauses (B)(i) through (iv) of the respective
definitions thereof.
The "Senior Percentage" for any Payment Date prior to the Class B Cross-over
Date (as described below), and for any Payment Date on or after the Class B
Cross-over Date on which any Class B Principal Distribution Test (as described
below) has not been satisfied, will equal 100%. On each Payment Date on or
after the Class B Cross-over Date, if each Class B Principal Distribution Test
has been satisfied on such Payment Date, the Senior Percentage will equal a
fraction, expressed as a percentage, the numerator of which is the sum of the
Class A Principal Balance (excluding the Class A-1A ARM Principal Balance and
the Class A-1B ARM Principal Balance) and the Class M Principal Balance for
such Payment Date and the denominator of which is the Pool Scheduled Principal
Balance of the Loans (excluding the Adjustable Rate Loans) for the immediately
preceding Payment Date.
The Senior Percentage of the Formula Principal Distribution Amount will be
distributed, to the extent of the Amount Available after payment of all
interest then accrued on the Class A Principal Balance, Class A-6 IO Notional
Principal Amount, Class M-1 Adjusted Principal Balance, Class M-2 Adjusted
Principal Balance and Class B-1 Adjusted Principal Balance, as follows:
(i) that portion, if any, of the Senior Percentage of the Formula
Principal Distribution Amount equal to the Class A-5 Lockout Pro Rata
Distribution Amount will be distributed to the Class A-5
Certificateholders; and
S-55
<PAGE>
(ii) the remainder of the Senior Percentage of the Formula Principal
Distribution Amount will be distributed in the following order: first, to
the Class A-1 Certificateholders until the Class A-1 Principal Balance has
been reduced to zero, then to the Class A-2 Certificateholders until the
Class A-2 Principal Balance has been reduced to zero, then to the Class A-3
Certificateholders until the Class A-3 Principal Balance has been reduced
to zero, then to the Class A-4 Certificateholders until the Class A-4
Principal Balance has been reduced to zero, then to the Class A-5
Certificateholders until the Class A-5 Principal Balance has been reduced
to zero, then pro rata to the Class A-1A ARM Certificateholders and the
Class A-1B ARM Certificateholders, then to the Class M-1 Certificateholders
until the Class M-1 Principal Balance has been reduced to zero and then to
the Class M-2 Certificateholders until the Class M-2 Principal Balance has
been reduced to zero.
The "Class A-5 Lockout Pro Rata Distribution Amount," as to any Payment Date,
is an amount equal to the lesser of:
(a) the product of (1) the Class A-5 Lockout Percentage, and (2) the
product of (A) a fraction, the numerator of which is the Class A-5
Principal Balance immediately preceding such Payment Date and the
denominator of which is the Class A Principal Balance (excluding the Class
A-1A ARM Principal Balance and the Class A-1B ARM Principal Balance)
immediately preceding such Payment Date, and (B) the Senior Percentage of
the Formula Principal Distribution Amount for such Payment Date, and
(b) the Class A-5 Principal Balance immediately preceding such Payment
Date.
The "Class A-5 Lockout Percentage," as to any Payment Date occurring during
the periods set forth below, is the percentage designated as such as follows:
<TABLE>
<CAPTION>
Class A-5
Period (dates inclusive) Lockout Percentage
------------------------ ------------------
<S> <C>
April 1999 through March 2001............................. 0%
April 2001 through March 2003............................. 20%
April 2003 through March 2004............................. 80%
April 2004 through March 2005............................. 100%
April 2005 and thereafter................................. 300%
</TABLE>
Payments of principal on the Class B-l Certificates will not commence until
the Class B Cross-over Date, and will be made on that Payment Date and each
Payment Date thereafter only if each Class B Principal Distribution Test is
satisfied on such Payment Date (unless the Class A Principal Balance and the
Class M Principal Balance have been reduced to zero). The "Class B Cross-over
Date" will be the earlier of (A) the Payment Date on which the Class M-2
Principal Balance is reduced to zero and (B) the Payment Date in April 2002.
On each Payment Date on or after the Class B Cross-over Date and prior to the
Payment Date on which the Class A Principal Balance and the Class M Principal
Balance have been reduced to zero, holders of Class B Certificates will be
entitled to distributions of principal only if each of the following tests
(each a "Class B Principal Distribution Test") is satisfied on such Payment
Date: (i) the average of the Sixty-Day Delinquency Ratio (as defined in the
Agreement) as of such Payment Date and the prior two Payment Dates must not
exceed 10%; (ii) the average of the Thirty-Day Delinquency Ratio (as defined in
the Agreement) as of such Payment Date and the prior two Payment Dates must not
exceed 12%; (iii) the Cumulative Realized Loss Ratio (as defined in the
Agreement) as of such Payment Date must not exceed 7.5%; (iv) the Current
Realized Loss Ratio (as defined in the Agreement) as of such Payment Date must
not exceed 2.0%; and (v) (a) the sum of the Class B Principal Balance plus the
amount, if any, by which the Aggregate Certificate Principal Balance for that
Payment Date is less than the Pool Scheduled Principal Balance for the
immediately preceding Payment Date divided by (b) the Pool Scheduled Principal
Balance as of the immediately preceding Payment Date, must be equal to or
greater than 15.3%.
S-56
<PAGE>
On each Payment Date on which the Class B Certificates are eligible to
receive distributions of principal, the Class B Percentage of the Formula
Principal Distribution Amount will be paid to the Class B-1 Certificateholders,
to the extent of the Amount Available after payment of all interest then
accrued on the Class A Principal Balance, Class A-6 IO Notional Principal
Amount, Class M-1 Adjusted Principal Balance, Class M-2 Adjusted Principal
Balance and Class B-1 Adjusted Principal Balance and all principal then due on
the Class A Certificates (other than the Class A-6 IO Certificates) and Class M
Certificates, until the Class B-l Principal Balance has been reduced to zero.
The "Class B Percentage" for any Payment Date will be equal to 100% minus the
Senior Percentage. The Class B Percentage for each Payment Date, if any, after
the Class A Principal Balance and the Class M Principal Balance have been
reduced to zero will be equal to 100%.
Notwithstanding the foregoing, on any Payment Date as to which there is a
Class A Liquidation Loss Principal Amount (which is the amount, if any, by
which the Pool Scheduled Principal Balance plus the Pre-Funded Amount is less
than the Class A Principal Balance), the remaining Amount Available, after
payment of all interest then accrued on the Class A Principal Balance, Class A-
6 IO Notional Principal Amount, Class M-1 Adjusted Principal Balance, Class M-2
Adjusted Principal Balance and Class B-1 Adjusted Principal Balance, will be
distributed pro rata to each Class of Class A Certificates (other than the
Class A-6 IO Certificates) based on the Principal Balance of such Class (but in
no event will such amount exceed the Principal Balance of any such Class).
If, as to any Payment Date, the remaining Amount Available, after payment of
all interest then accrued on the Class A Principal Balance, Class A-6 IO
Notional Principal Amount, Class M-1 Adjusted Principal Balance, Class M-2
Adjusted Principal Balance and Class B-1 Adjusted Principal Balance, is less
than the sum of the Group I ARM Formula Principal Distribution Amount, the
Group II ARM Formula Principal Distribution Amount and the Senior Percentage of
the Formula Principal Distribution Amount, the amounts to be distributed to the
Class A-1A ARM Certificateholders and Class A-1B ARM Certificateholders, on the
one hand, and the remaining Class A Certificateholders (other than the Class A-
6 IO Certificates), Class M-1 Certificateholders and Class M-2
Certificateholders, on the other, will be allocated pro rata based upon the
respective portions of the Amount Available that would have been distributed to
the Class A, Class M-1 and Class M-2 Certificateholders, as described above,
had the remaining Amount Available been sufficient therefor.
Class B-2A Interest
Interest on the outstanding Class B-2A Principal Balance will accrue from
March 18, 1999, or from the most recent Payment Date on which interest has been
paid, to but excluding the following Payment Date, and will be computed on the
basis of a 360-day year composed of twelve 30-day months.
To the extent of the remaining Amount Available, if any, for a Payment Date,
after payment of all interest and principal then payable on the Class A, Class
M and Class B-1 Certificates, interest will be paid to the Class B-2A
Certificateholders on such Payment Date at the Class B-2A Pass-Through Rate on
the then outstanding Class B-2A Principal Balance. The Class B-2A Pass-Through
Rate is set forth on the cover of this Prospectus Supplement. The "Class B-2A
Principal Balance" is the Original Class B-2A Principal Balance less all
amounts previously distributed to the Class B-2A Certificateholders in respect
of principal.
In the event that, on a particular Payment Date, the remaining Amount
Available in the Certificate Account is not sufficient to make a full
distribution of interest to the Class B-2A Certificateholders, the amount of
the deficiency will be carried forward as an amount that the Class B-2A
Certificateholders are entitled to receive on the next Payment Date. Any amount
so carried forward will, to the extent legally permissible, bear interest at
the Class B-2A Pass-Through Rate.
Class B-2A Principal
Except for payment of any Class B-2A Additional Principal Distribution
Amount, as described below, payment of principal on the Class B-2A Certificates
will not commence until the Payment Date on which the
S-57
<PAGE>
Class B-1 Principal Balance has been reduced to zero (the "Class B-1 Cross-over
Date"), and will be made on that Payment Date and each Payment Date thereafter
only if each Class B Principal Distribution Test is satisfied on such Payment
Date (unless the Class A Principal Balance and the Class M Principal Balance
have been reduced to zero). On any such Payment Date, the Class B Percentage of
the Formula Principal Distribution Amount will be distributed, to the extent of
the Amount Available after payment of all interest and principal on the Class
A, Class M and Class B-1 Certificates and all interest on the Class B-2A
Certificates, to the Class B-2A Certificateholders until the Class B-2A
Principal Balance has been reduced to zero.
The Class B-2A Certificateholders will also be entitled to receive additional
distributions in respect of principal (each a "Class B-2A Additional Principal
Distribution Amount") on each Payment Date to the extent there is any Amount
Available remaining after payment of all interest and principal on the Class A,
Class M and Class B Certificates, any additional amounts payable on the Class
A-1A ARM or Class A-1B ARM Certificates because the Available Funds Pass-
Through Rate was less than one-month LIBOR plus the Class A-1A Pass-Through
Margin or Class A-1B Pass-Through Margin, as applicable, and the Monthly
Servicing Fee to the Servicer for such Payment Date. The Class B-2A Additional
Principal Distribution Amount for any Payment Date will be equal to the lesser
of (i) one-half of such remaining Amount Available, and (ii) the amount
necessary to reduce the Class B-2A Principal Balance to zero (after taking into
account any distributions to made pursuant to the preceding paragraph).
Class B-2 Interest
Interest on the outstanding Class B-2 Principal Balance will accrue from
March 18, 1999, or from the most recent Payment Date on which interest has been
paid, to but excluding the following Payment Date, and will be computed on the
basis of a 360-day year of twelve 30-day months.
To the extent of (i) the remaining Amount Available, if any, for a Payment
Date, after payment of all interest and (excluding any Class B-2A Additional
Principal Distribution Amount) principal then payable on the Class A, Class M-
1, Class M-2, Class B-1 and Class B-2A Certificates, and (ii) the Class B-2
Guaranty Payment, if any, for such date, interest will be paid to the Class B-2
Certificateholders on such Payment Date at the Class B-2 Pass-Through Rate on
the then outstanding Class B-2 Principal Balance. The "Class B-2 Principal
Balance" is the Original Class B-2 Principal Balance less all amounts
previously distributed to the Class B-2 Certificateholders (including any Class
B-2 Guaranty Payments) in respect of principal.
In the event that, on a particular Payment Date, the remaining Amount
Available in the Certificate Account plus any amounts actually paid under the
Class B-2 Limited Guaranty are not sufficient to make a full distribution of
interest to the Class B-2 Certificateholders, the amount of the deficiency will
be carried forward as an amount that the Class B-2 Certificateholders are
entitled to receive on the next Payment Date. Any amount so carried forward
will, to the extent legally permissible, bear interest at the Class B-2 Pass-
Through Rate.
Class B-2 Principal
Except for payments of the Class B-2 Liquidation Loss Principal Amount,
payments of principal on the Class B-2 Certificates will not commence until the
Payment Date on which the Class B-1 and the Class B-2A Principal Balances have
been reduced to zero (the "Class B-1 and B-2A Cross-over Date"), and will be
made on that Payment Date and each Payment Date thereafter only if each Class B
Principal Distribution Test is satisfied on such Payment Date (unless the Class
A Principal Balance and the Class M Principal Balance have been reduced to
zero). On any such Payment Date, the Class B Percentage of the Formula
Principal Distribution Amount will be distributed, to the extent of the Amount
Available after payment of all interest and principal then due on the Class A
and Class M Certificates, and any amounts actually paid under the Class B-2
Limited Guaranty, in each case after payment of interest on the Class B-2
Certificates, to the Class B-2 Certificateholders until the Class B-2 Principal
Balance has been reduced to zero.
S-58
<PAGE>
On each Payment Date, the Class B-2 Certificateholders will be entitled to
receive, pursuant to the Class B-2 Limited Guaranty, the Class B-2 Liquidation
Loss Principal Amount until the Class B-2 Principal Balance has been reduced to
zero. See "--Losses on Liquidated Loans" below.
Calculation of One-Month LIBOR
"LIBOR" ("London Interbank Offered Rate") with respect to any monthly
interest period will be established by the calculation agent appointed by the
Trust (the "Calculation Agent") and will equal the offered rate for United
States dollar deposits for one month that appears on Telerate Page 3750 as of
11:00 A.M., London time, on the second LIBOR Business Day prior to such monthly
interest period (a "LIBOR Determination Date"). "Telerate Page 3750" means the
display page so designated on the Dow Jones Telerate Service (or such other
page as may replace that page on that service, or such other service as may be
designated by the Calculation Agent as the information vendor, for the purpose
of displaying London interbank offered rates of major banks). If such rate
appears on Telerate Page 3750, LIBOR will be such rate. "LIBOR Business Day" as
used herein means a day that is both a business day and a day on which banking
institutions in the City of London, England are not required or authorized by
law to be closed. If on any LIBOR Determination Date the offered rate does not
appear on Telerate Page 3750, the Calculation Agent will request each of the
reference banks (which shall be major banks that are engaged in transactions in
the London interbank market selected by the Calculation Agent) to provide the
Calculation Agent with its offered quotation for United States dollar deposits
for one month to prime banks in the London interbank market as of 11:00 A.M.,
London time, on such date. If at least two reference banks provide the
Calculation Agent with such offered quotations, LIBOR on such date will be the
arithmetic mean, rounded upward, if necessary, to the nearest 1/100,000 of 1%
(.0000001), with five one-millionths of a percentage point rounded upward, of
all such quotations. If on such date fewer than two of the reference banks
provide the Calculation Agent with such offered quotations, LIBOR on such date
will be the arithmetic mean, rounded upward, if necessary, to the nearest
1/100,000 of 1% (.0000001), with five one-millionths of a percentage point
rounded upward, of the offered per annum rates that one or more leading banks
in the City of New York selected by the Calculation Agent are quoting as of
11:00 A.M., New York City time, on such date to leading European banks for
United States dollar deposits for one month; provided, however, that if such
banks are not quoting as described above, LIBOR for such date will be LIBOR
applicable to the monthly interest period immediately preceding such monthly
interest period. Notwithstanding the foregoing, however, LIBOR for a Payment
Date shall not be based on LIBOR for the prior Payment Date for three
consecutive Payment Dates. If, under the priorities described above, LIBOR for
a Payment Date would be based on LIBOR for the previous Payment Date for the
second consecutive Payment Date, the Calculation Agent shall select an
alternative comparable index (over which the Calculation Agent has no control)
used for determining one-month Eurodollar lending rates that is calculated and
published (or otherwise made available) by an independent third party. The
"Calculation Agent" will initially be the Trustee.
Subordination of Class M Certificates and Class B Certificates
The rights of the holders of the Class M Certificates and Class B
Certificates to receive distributions with respect to the Loans, as well as any
other amounts constituting Amount Available, will be subordinated, to the
extent described herein, to such rights of the holders of the Class A
Certificates. This subordination is intended to enhance the likelihood of
regular receipt by the holders of the Class A Certificates of the full amount
of their scheduled monthly payments of interest and principal and to afford
such holders protection against losses on Liquidated Loans.
A portion of the protection afforded to the holders of the Class A
Certificates by means of the subordination of the Class M and Class B
Certificates will be accomplished by the preferential right of the Class A
Certificateholders to receive on any Payment Date the amount of interest due on
the Class A Certificates, including any interest due on a prior Payment Date
but not received, prior to any distribution being made on a Payment Date in
respect of interest on the Class M and Class B Certificates. Thereafter, any
remaining Amount Available in the Certificate Account will be applied to the
payment of interest due on the
S-59
<PAGE>
Class M-1 Adjusted Principal Balance, then interest due on the Class M-2
Adjusted Principal Balance and then interest due on the Class B-1 Adjusted
Principal Balance.
After payment of all interest then accrued on the Class A Principal Balance,
Class A-6 IO Notional Principal Amount, Class M-1 Adjusted Principal Balance,
Class M-2 Adjusted Principal Balance and Class B-1 Adjusted Principal Balance
as aforesaid, any remaining Amount Available will be distributed in the
following order of priority, to the extent sufficient therefor: first, the
Group I ARM Formula Principal Distribution Amount, the Group II ARM Formula
Principal Distribution Amount and the Senior Percentage or the Class B
Percentage, as applicable, of the Formula Principal Distribution Amount will be
distributed to the Class A, Class M and Class B-1 Certificateholders in the
order of priority described under "--Principal on the Class A, Class M-1, Class
M-2 and Class B-1 Certificates" above; second, any unpaid Class M-1 Liquidation
Loss Interest Amount (as described below under "--Losses on Liquidated Loans")
will be distributed to the Class M-1 Certificateholders; third, any unpaid
Class M-2 Liquidation Loss Interest Amount (as described below under "--Losses
on Liquidated Loans") will be distributed to the Class M-2 Certificateholders;
and, fourth, any unpaid Class B-1 Liquidation Loss Interest Amount (as
described below under "--Losses on Liquidated Loans") will be distributed to
the Class B-1 Certificateholders.
The rights of the holders of the Class B-2A Certificates to receive
distributions with respect to the Loans and other amounts in the Certificate
Account will be subordinated to such rights of the holders of the Class A
Certificates, Class M Certificates and Class B-1 Certificates. Thus, the Class
B-2A Certificateholders will be entitled to distributions of interest and
principal on the Class B-2A Certificates only after distributions of all
interest and principal then payable on the Class A, Class M and Class B-1
Certificates.
The rights of the holders of the Class B-2 Certificates to receive
distributions with respect to the Loans and other amounts in the Certificate
Account will be subordinated to such rights of the holders of the Class A,
Class M, Class B-1 and Class B-2A Certificates. Thus, the Class B-2
Certificateholders will be entitled to distributions with respect to the Loans
only after distributions of all interest and principal then payable on the
Class A, Class M, Class B-1 and Class B-2A Certificates.
If a Class B-2 Liquidation Loss Amount is realized for any Payment Date and
the Company fails to pay such amount pursuant to its Class B-2 Limited
Guaranty, the Class B-2 Certificateholders may incur losses on their investment
in the Class B-2 Certificates to the extent such losses are not made up from
future payments on the Loans or the Class B-2 Limited Guaranty.
Losses on Liquidated Loans
As described above, the distribution of principal to the Class A
Certificateholders (other than the Class A-6 IO Certificates) is intended to
include the Senior Percentage of the Scheduled Principal Balance of each Loan
(other than the Adjustable Rate Loans) that became a Liquidated Loan during the
preceding Due Period and the Scheduled Principal Balance of each Adjustable
Rate Loan that became a Liquidated Loan during the preceding Due Period. If the
Net Liquidation Proceeds from any Liquidated Loan are less than the Scheduled
Principal Balance of such Liquidated Loan plus accrued and unpaid interest
thereon, the deficiency will, in effect, be absorbed by the Class C
Certificateholders, then the Class B-3I Certificateholder, then the Monthly
Servicing Fee otherwise payable to the Servicer (so long as the Company or any
wholly owned subsidiary of the Company is the Servicer), then the Class B-2
Certificateholders, then the Class B-2A Certificateholders, then the Class B-1
Certificateholders, then the Class M-2 Certificateholders and then the Class M-
1 Certificateholders, since a portion of the Amount Available equal to such
deficiency and otherwise distributable to them will be paid to the Class A
Certificateholders. Likewise, to the extent the Class M-1 Certificateholders,
the Class M-2 Certificateholders, the Class B-1 Certificateholders or the Class
B-2A Certificateholders are entitled to receive distributions of principal,
similar deficiencies could result for each Class of Certificates with a lower
payment priority.
S-60
<PAGE>
In the event the Amount Available for any Payment Date is insufficient to
distribute the full Formula Principal Distribution Amount, Group I ARM Formula
Principal Distribution Amount and Group II ARM Formula Principal Distribution
Amount for such Payment Date to the Certificateholders, the aggregate
outstanding Principal Balance of the Certificates will decline on that Payment
Date by an amount less than the decline in the Pool Scheduled Principal Balance
for that Payment Date. Because of the Class B-2A Additional Principal
Distribution Amount that will be paid on each Payment Date, assuming that the
Amount Available is sufficient therefor, it is unlikely that distributions of
principal on one or more Payment Dates of less than the Formula Principal
Distribution Amount for subsequent Payment Dates would result in the aggregate
outstanding Principal Balance of the Certificates being greater than the Pool
Scheduled Principal Balance. Nevertheless, severe losses and delinquencies on
the Loan Pool could create such a deficiency. In such event, the amount of such
deficiency (the "Liquidation Loss Amount") would be allocated first to the
Class B-2 Certificates (the "Class B-2 Liquidation Loss Amount"), and the
Company would be obligated to pay the amount of such Class B-2 Liquidation Loss
Amount to the Class B-2 Certificateholders pursuant to the Class B-2 Limited
Guaranty. If, on any Payment Date, the aggregate principal balance of the Class
A, Class M and Class B-1 Certificates is greater than the Pool Scheduled
Principal Balance, the amount of that deficiency would be allocated to reduce
the Class B-1 Adjusted Principal Balance (a "Class B-1 Liquidation Loss
Amount"). If the Class B-1 Adjusted Principal Balance were reduced to zero as a
result of any Class B-1 Liquidation Loss Amount, any further Liquidation Loss
Amounts realized would be allocated to reduce the Class M-2 Adjusted Principal
Balance (a "Class M-2 Liquidation Loss Amount"). If the Class M-2 Adjusted
Principal Balance were reduced to zero as a result of any Class M-2 Liquidation
Loss Amount, any further Liquidation Loss Amounts realized would be allocated
to reduce the Class M-1 Adjusted Principal Balance (a "Class M-1 Liquidation
Loss Amount"). Any such Liquidation Loss Amounts would be reduced on subsequent
Payment Dates to the extent that the Amount Available in the Certificate
Account on such Payment Dates is sufficient to permit the distribution of
principal due, but not paid, on the Certificates on prior Payment Dates. In the
event the Adjusted Principal Balance of the Class M-1, Class M-2 or Class B-1
Certificates were reduced by a Liquidation Loss Amount, interest accruing on
such Class would be calculated on the reduced Adjusted Principal Balance of
such Class. The interest accruing on such Class's Liquidation Loss Amount each
month (such Class's "Liquidation Loss Interest Amount"), plus interest at the
applicable Pass-Through Rate on any Liquidation Loss Interest Amount due on a
prior Payment Date but not paid, would be paid to the Certificateholders of
such Class from the Amount Available, after distributions of principal on all
Class A, Class M and Class B-1 Certificates in the order of priority described
above under "--Subordination of Class M and Class B Certificates."
If the Amount Available is not sufficient to cover the entire amount
distributable to the Class A Certificateholders, the Class M-1
Certificateholders or the Class M-2 Certificateholders on a particular Payment
Date, then the Senior Percentage on future Payment Dates may be increased and
the Class B Percentage on future Payment Dates may be reduced as a result of
such deficiency.
But for the effect of the subordination of the Class M-2, Class B and Class C
Certificates and the related Monthly Servicing Fee otherwise payable to the
Servicer (so long as the Company or any wholly owned subsidiary of the Company
is the Servicer), the Class M-1 Certificateholders will absorb all losses on
each Liquidated Loan in the amount by which its Net Liquidation Proceeds are
less than its unpaid principal balance plus accrued and unpaid interest thereon
less the related Monthly Servicing Fee.
But for the effect of the subordination of the Class B and Class C
Certificates and the related Monthly Servicing Fee otherwise payable to the
Servicer (so long as the Company or any wholly owned subsidiary of the Company
is the Servicer), the Class M-2 Certificateholders will absorb all losses on
each Liquidated Loan in the amount by which its Net Liquidation Proceeds are
less than its unpaid principal balance plus accrued and unpaid interest thereon
less the related Monthly Servicing Fee.
S-61
<PAGE>
But for the effect of the subordination of the Class B-2A, Class B-2, Class
B-3I and Class C Certificates and the related Monthly Servicing Fee otherwise
payable to the Servicer (so long as the Company or any wholly owned subsidiary
of the Company is the Servicer), the Class B-1 Certificateholders will absorb
all losses on each Liquidated Loan in the amount by which its Net Liquidation
Proceeds are less than its unpaid principal balance plus accrued and unpaid
interest thereon less the related Monthly Servicing Fee.
But for the effect of the subordination of the Class B-2, Class B-3I and
Class C Certificates and the related Monthly Servicing Fee otherwise payable to
the Servicer (so long as the Company or any wholly owned subsidiary of the
Company is the Servicer), the Class B-2A Certificateholders will absorb all
losses on each Liquidated Loan in the amount by which its Net Liquidation
Proceeds are less than its unpaid principal balance plus accrued and unpaid
interest thereon less the related Monthly Servicing Fee.
But for the payments under the Class B-2 Limited Guaranty described below and
the subordination of the Class B-3I and Class C Certificates and the related
Monthly Servicing Fee otherwise payable to the Servicer (so long as the Company
or any wholly owned subsidiary of the Company is the Servicer), the Class B-2
Certificateholders will absorb all losses on each Liquidated Loan in the amount
by which its Net Liquidation Proceeds are less than its unpaid principal
balance plus accrued and unpaid interest thereon less the related Monthly
Servicing Fee.
Advances
To the extent that collections on a Loan in any Due Period are less than the
scheduled payment due thereon, the Servicer will be obligated to make an
advance (each an "Advance") of the uncollected portion of such scheduled
payment. The Servicer will be obligated to advance a delinquent payment on a
Loan only to the extent that the Servicer, in its sole discretion, expects to
recoup such Advance from subsequent funds available therefor in the Certificate
Account.
If the Servicer fails to make an Advance required under the Agreement, the
Trustee will be obligated to deposit the amount of such Advance in the
Certificate Account on the Payment Date. The Trustee will not, however, be
obligated to deposit any such amount if (i) the Trustee does not expect to
recoup such Advance from subsequent funds available therefor in the Certificate
Account, or (ii) the Trustee determines that it is not legally able to make
such Advance.
Capitalized Interest Account
Because payments received with respect to interest on the Loans may be
insufficient to cover payments of interest on the Certificates on the Payment
Dates in April, May and June 1999, an account (the "Capitalized Interest
Account") will be established on the Closing Date with the deposit of an amount
approved by S&P and Fitch. Funds on deposit in the Capitalized Interest Account
will be invested in Eligible Investments (as described under "--Payments on
Loans" above). If the Amount Available (including Advances made by the
Servicer, as described above) is insufficient to make a full distribution of
interest on the Certificates (other than the Class B-2 Certificates) on any of
the Payment Dates in April, May or June 1999, the Trustee will withdraw the
amount of any such shortfall from the Capitalized Interest Account and deposit
such amount in the Certificate Account. The Company will be obligated under the
Class B-2 Limited Guaranty to make a Class B-2 Guaranty Payment equal to any
shortfall in the amount distributable on the Class B-2 Certificates, as
described under "Description of the Class B-2 Limited Guaranty." The
Capitalized Interest Account will be part of the Trust but not part of the
Master REMIC or the Subsidiary REMIC. Any funds remaining on deposit in the
Capitalized Interest Account will be released to a subsidiary of the Company in
June 1999 (or after the Pre-Funding Account has been fully used, if earlier).
S-62
<PAGE>
Reports to Certificateholders
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class A Certificateholder, a statement in respect of the
related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of each Class of Class
A Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of each Class of Class
A Certificates allocable to principal (separately identifying (1) the
aggregate amount of any Principal Prepayments included and (2) that portion
of any such distribution to Class A-5 Certificateholders constituting the
Class A-5 Lockout Pro Rata Distribution Amount);
(c) the amount, if any, by which the Class A Formula Distribution
Amount exceeds the Class A Distribution Amount for such Payment Date;
(d) the Principal Balance of each Class of Class A Certificates and
the Notional Principal Amount for the Class A-6 IO Certificates after
giving effect to the distribution of principal on such Payment Date;
(e) the Senior Percentage and the Class A-5 Lockout Percentage for
such Payment Date;
(f) the Pool Scheduled Principal Balance for such Payment Date;
(g) the Pool Factor (a percentage derived from a fraction the
numerator of which is the sum of the Class A Principal Balance, the Class M
Principal Balance and the Class B Principal Balance and the denominator of
which is the Cut-off Date Pool Principal Balance plus the amount in the
Pre-Funding Account); and
(h) the number and aggregate principal balance of Loans delinquent (i)
30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class A Certificate with a 1% Percentage Interest or per
$1,000 denomination of Class A Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class A
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class M-1 Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class M-1
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class M-1
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class M-1 Formula Distribution
Amount exceeds the Class M-1 Remaining Amount Available for such Payment
Date;
(d) the Principal Balance of the Class M-1 Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) any unpaid interest on any Class M-1 Liquidation Loss Principal
Amounts, after giving effect to payments of such interest on such Payment
Date;
(f) the Senior Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance for such Payment Date;
(h) the Pool Factor; and
(i) the number and aggregate principal balance of Loans delinquent (i)
30-59 days and (ii) 60 or more days.
S-63
<PAGE>
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class M-1 Certificate with a 1% Percentage Interest or per
$1,000 denomination of Class M-1 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class M-1
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class M-2 Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class M-2
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class M-2
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class M-2 Formula Distribution
Amount exceeds the Class M-2 Remaining Amount Available for such Payment
Date;
(d) the Principal Balance of the Class M-2 Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) any unpaid interest on any Class M-2 Liquidation Loss Principal
Amounts, after giving effect to payments of such interest on such Payment
Date;
(f) the Senior Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance for such Payment Date;
(h) the Pool Factor; and
(i) the number and aggregate principal balance of Loans delinquent (i)
30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class M-2 Certificate with a 1% Percentage Interest or per
$1,000 denomination of Class M-2 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class M-2
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class B-1 Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class B-1
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class B-1
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the Class B-1 Formula Distribution
Amount exceeds the Class B-1 Remaining Amount Available for such Payment
Date;
(d) the Principal Balance of the Class B-1 Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) any unpaid interest on any Class B-1 Liquidation Loss Principal
Amounts, after giving effect to payments of such interest on such Payment
Date;
(f) the Class B Percentage for such Payment Date;
(g) the Pool Scheduled Principal Balance for such Payment Date;
(h) the Pool Factor; and
S-64
<PAGE>
(i) the number and aggregate principal balance of Loans delinquent (i)
30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class B-1 Certificate with a 1% Percentage Interest or per
$1,000 denomination of Class B-1 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class B-1
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class B-2A Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of the Class B-2A
Certificates allocable to interest (separately identifying any unpaid
interest shortfall included);
(b) the amount of such distribution to holders of the Class B-2A
Certificates allocable to principal (separately identifying (1) the
aggregate amount of any Principal Prepayments included and (2) that portion
of any such distribution constituting the Class B-2A Additional Principal
Distribution Amount);
(c) the amount, if any, by which the Class B-2A Formula Distribution
Amount exceeds the Class B-2A Remaining Amount Available for such Payment
Date;
(d) the Principal Balance of the Class B-2A Certificates after giving
effect to the distribution of principal on such Payment Date;
(e) the Class B Percentage for such Payment Date;
(f) the Pool Scheduled Principal Balance for such Payment Date;
(g) the Pool Factor; and
(h) the number and aggregate principal balance of Loans delinquent (i)
30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (d) will be expressed as
dollar amounts for a Class B-2A Certificate with a 1% Percentage Interest or
per $1,000 denomination of Class B-2A Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class B-2A
Certificateholder of record at any time during such calendar year as to the
aggregate of amounts reported pursuant to (a) and (b) above for such calendar
year.
The Servicer will furnish to the Trustee, and the Trustee will include with
each distribution to a Class B-2 Certificateholder, a statement in respect of
the related Payment Date setting forth, among other things:
(a) the amount of such distribution to holders of Class B-2
Certificates allocable to interest;
(b) the amount of such distribution to holders of Class B-2
Certificates allocable to principal (separately identifying the aggregate
amount of any Principal Prepayments included);
(c) the amount, if any, by which the sum of the Class B-2 Formula
Distribution Amount and the Class B-2 Liquidation Loss Principal Amount, if
any, exceeds the Class B-2 Distribution Amount for such Payment Date;
(d) the Class B-2 Liquidation Loss Principal Amount, if any, for such
Payment Date;
(e) any unpaid interest on any Class B-2 Liquidation Loss Principal
Amounts, after giving effect to payments of such interest on such Payment
Date;
(f) the Class B-2 Guaranty Payment, if any, for such Payment Date;
S-65
<PAGE>
(g) the Class B-2 Principal Balance after giving effect to the
distribution of principal on such Payment Date;
(h) the Class B Percentage for such Payment Date;
(i) the Pool Scheduled Principal Balance for such Payment Date;
(j) the Pool Factor; and
(k) the number and aggregate principal balance of Loans delinquent (i)
30-59 days and (ii) 60 or more days.
Information furnished pursuant to clauses (a) through (c) and clause (g) will
be expressed as dollar amounts for a Class B-2 Certificate with a 1% Percentage
Interest or per $1,000 denomination of Class B-2 Certificate.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer will furnish a report to each Class B-2
Certificateholder of record at any time during such calendar year as to the
aggregate amounts reported pursuant to (a) and (b) above for such calendar
year.
Repurchase Option
The Agreement provides that at any time that the Pool Scheduled Principal
Balance is less than 10% of the Cut-off Date Pool Principal Balance, the
Servicer will have the option to repurchase, on 30 days' prior written notice
to the Trustee, all outstanding Loans (other than any Loan as to which title to
the underlying property has been assigned) at a price sufficient to pay the
Aggregate Certificate Principal Balance plus the Monthly Interest due on all
Certificates on the Payment Date occurring in the month following the date of
repurchase. Such amount will be distributed on such Payment Date.
Collection and Other Servicing Procedures
The Servicer will manage, administer, service and make collections on the
Loans, exercising the degree of skill and care consistent with the highest
degree of skill and care that the Servicer exercises with respect to similar
loans (including manufactured housing contracts) serviced by the Servicer. The
Servicer will not be required to cause to be maintained, or otherwise monitor
the maintenance of, hazard insurance on the improved properties. The Company
does, however, as a matter of its own policy, monitor proof of hazard insurance
coverage (other than flood insurance) and require that it be named as an
additional loss payee on all first lien secured loans and generally on junior
lien secured loans with amounts financed of over $20,000.
Servicing Compensation and Payment of Expenses
The Servicer will receive a Monthly Servicing Fee for each Due Period (paid
on the next succeeding Payment Date) for servicing the Loans equal to one-
twelfth of the product of .50% and the remaining Pool Scheduled Principal
Balance.
The Monthly Servicing Fee provides compensation for customary third-party
servicing activities to be performed by the Servicer for the Trust, for
additional administrative services performed by the Servicer on behalf of the
Trust and for expenses paid by the Servicer on behalf of the Trust. The
Servicer is also entitled to reimbursement out of the liquidation proceeds of a
Liquidated Loan for customary out-of-pocket liquidation expenses incurred by
it.
Customary servicing activities include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each Loan. Administrative services performed by the Servicer on
behalf of the Trust include selecting and packaging the Loans, calculating
distributions to Certificateholders and providing related data processing and
reporting services for Certificateholders and on behalf of the Trustee.
Expenses incurred in connection with the servicing of the Loans and paid by the
Servicer from its servicing fees include payment of
S-66
<PAGE>
fees and expenses of accountants, payments of all fees and expenses incurred in
connection with the enforcement of Loans or foreclosure on collateral relating
thereto, payment of Trustee's fees, and payment of expenses incurred in
connection with distributions and reports to Certificateholders.
Evidence as to Compliance
The Agreement provides for delivery to the Trustee of a monthly report by the
Servicer no later than one Business Day following the Determination Date,
setting forth the information described under "Reports to Certificateholders"
above. Each report to the Trustee will be accompanied by a statement from an
appropriate officer of the Servicer certifying the accuracy of such report and
stating that the Servicer has not defaulted in the performance of its
obligations under the Agreement. On or before May 1 of each year, beginning in
2000, the Servicer will deliver to the Trustee a report of
PricewaterhouseCoopers LLP, or another nationally recognized accounting firm,
stating that such firm has examined certain documents and records relating to
the servicing of loans serviced by the Servicer and stating that, on the basis
of such examination, such servicing has been conducted in compliance with the
Agreement, except for any exceptions set forth in such report.
The Agreement provides that the Servicer shall furnish to the Trustee such
reasonably pertinent underlying data as can be generated by the Servicer's
existing data processing system without undue modification or expense.
The Agreement provides that a Certificateholder holding Certificates
representing at least 5% of the Aggregate Certificate Principal Balance will
have the same rights of inspection as the Trustee and may upon written request
to the Servicer receive copies of all reports provided to the Trustee.
Transferability
The Certificates are subject to certain restrictions on transfer to or for
the benefit of employee benefit plans, trusts or accounts subject to ERISA and
described in Section 4975 of the Code. See "ERISA Considerations" herein and in
the Prospectus.
Certain Matters Relating to the Company
The Agreement provides that the Company may not resign from its obligations
and duties as Servicer thereunder, except upon a determination that the
Company's performance of such duties is no longer permissible under the
Agreement or applicable law, and prohibits the Company from extending credit to
any Certificateholder for the purchase of a Certificate, purchasing
Certificates in any agency or trustee capacity or lending money to the Trust.
The Company can be removed as Servicer only pursuant to an Event of Termination
as discussed below.
Events of Termination
An Event of Termination under the Agreement will occur if (a) the Servicer
fails to make any payment or deposit required under the Agreement (including an
Advance) and such failure continues for four Business Days; (b) the Servicer
fails to observe or perform in any material respect any other covenant or
agreement in the Agreement which continues unremedied for thirty days; (c) the
Servicer conveys, assigns or delegates its duties or rights under the
Agreement, except as specifically permitted under the Agreement, or attempts to
make such a conveyance, assignment or delegation; (d) a court having
jurisdiction in the premises enters a decree or order for relief in respect of
the Servicer in an involuntary case under any applicable bankruptcy, insolvency
or other similar law now or hereafter in effect, or appoints a receiver,
liquidator, assignee, custodian, trustee, or sequestrator (or similar official)
of the Servicer, as the case may be, or enters a decree or order for any
substantial liquidation of its affairs; (e) the Servicer commences a voluntary
case under any applicable bankruptcy, insolvency or similar law, or consents to
the entry of an order for relief in an involuntary case under any such law, or
consents to the appointment of or taking possession by a receiver, liquidator,
assignee, trustee, custodian or its creditors, or fails to, or admits in
writing its inability to, pay its
S-67
<PAGE>
debts as they become due, or takes any corporate action in furtherance of the
foregoing; (f) the Servicer fails to be an Eligible Servicer; or (g) the
Servicer's seller-servicer loan with GNMA is terminated. The Servicer will be
required under the Agreement to give the Trustee and the Certificateholders
notice of an Event of Termination promptly upon the occurrence of such event.
Rights Upon an Event of Termination
If an Event of Termination has occurred and is continuing, either the Trustee
or holders of Certificates representing 25% or more of the Aggregate
Certificate Principal Balance may terminate all of the Servicer's management,
administrative, servicing and collection functions under the Agreement. Upon
such termination, the Trustee or its designee will succeed to all the
responsibilities, duties and liabilities of the Company as Servicer under the
Agreement and will be entitled to similar compensation arrangements; provided,
however, that neither the Trustee nor any successor Servicer will assume any
accrued obligation of the prior servicer or any obligation of the Company to
repurchase Loans for breaches of representations and warranties, and the
Trustee will not be liable for any acts or omissions of the Servicer occurring
prior to a transfer of the Servicer's servicing and related functions or for
any breach by the Servicer of any of its representations and warranties
contained in the Agreement or any related document or agreement.
Notwithstanding such termination, the Servicer shall be entitled to payment of
certain amounts payable to it prior to such termination, for services rendered
prior to such termination. No such termination will affect in any manner the
Company's obligation to repurchase certain Loans for breaches of
representations or warranties under the Agreement. In the event that the
Trustee is unwilling or unable so to act, it may appoint, or petition a court
of competent jurisdiction for the appointment of, an Eligible Servicer to act
as successor to the Servicer under the Agreement. The Trustee and such
successor may agree upon the servicing compensation to be paid (after receiving
comparable bids from other Eligible Servicers), which may not be greater than
the Monthly Servicing Fee payable to the Company as Servicer under the
Agreement without the consent of all of the Certificateholders.
Termination of the Agreement
The Agreement will terminate (after distribution of all principal and
interest then due to the Certificateholders) on the earlier of (a) the Payment
Date on which the Pool Scheduled Principal Balance is reduced to zero; or (b)
the Payment Date occurring in the month following the Servicer's repurchase of
the Loans as described under "Description of the Certificates--Repurchase
Option." However, the Company's representations, warranties and indemnities
will survive any termination of the Agreement.
Amendment; Waiver
The Agreement may be amended by agreement of the Trustee, the Servicer and
the Company at any time without the consent of the Certificateholders to cure
any ambiguity, to correct or supplement any provision which may be inconsistent
with any other provision or to add other provisions not inconsistent with the
Agreement, upon receipt of an opinion of counsel to the Servicer that such
amendment will not adversely affect in any material respect the interests of
any Certificateholder.
The Agreement may also be amended from time to time by the Trustee, the
Servicer and the Company with the consent of holders of Certificates
representing 66 2/3% or more of the Aggregate Certificate Principal Balance,
and holders of Certificates representing 51% or more of the Aggregate
Certificate Principal Balance may vote to waive any Event of Termination,
provided that no such amendment or waiver shall (a) reduce in any manner the
amount of, or delay the timing of, collections of payments on Loans or
distributions which are required to be made on any Certificate, or (b) reduce
the aggregate amount of Certificates required for any amendment of the
Agreement, without the unanimous consent of the Certificateholders.
The Trustee is required under the Agreement to furnish Certificateholders
with notice promptly upon execution of any amendment to the Agreement.
S-68
<PAGE>
Indemnification
The Agreement provides that the Company will defend and indemnify the Trust,
the Trustee (including any agent of the Trustee) and the Certificateholders
against any and all costs, expenses, losses, damages, claims and liabilities,
including reasonable fees and expenses of counsel and expenses of litigation
(a) arising out of or resulting from the use or ownership by the Company or any
affiliate thereof of any real estate securing a Loan, (b) for any taxes which
may at any time be asserted with respect to, and as of the date of, the
conveyance of the Loans to the Trust (but not including any federal, state or
other tax arising out of the creation of the Trust and the issuance of the
Certificates), and (c) with respect to certain other tax matters.
The Agreement also provides that the Servicer will defend and indemnify the
Trust, the Trustee and the Certificateholders (which indemnification will
survive any removal of the Servicer) against any and all costs, expenses,
losses, damages, claims and liabilities, including reasonable fees and expenses
of counsel and expenses of litigation, in respect of any action taken by the
Company as Servicer with respect to any Loan.
Duties and Immunities of the Trustee
The Trustee will make no representations as to the validity or sufficiency of
the Agreement, the Certificates or any Loan, Loan file or related documents,
and will not be accountable for the use or application by the Company of any
funds paid to the Company in consideration of the conveyance of the Loans, or
deposited into the Certificate Account by the Servicer. If no Event of
Termination has occurred, the Trustee will be required to perform only those
duties specifically required of it under the Agreement. However, upon receipt
of the various certificates, reports or other instruments required to be
furnished to it, the Trustee will be required to examine them to determine
whether they conform to the requirements of the Agreement.
Under the Agreement the Servicer will agree (a) to pay to the Trustee from
time to time reasonable compensation for all services rendered by it thereunder
(which compensation shall not be limited by any provision of law in regard to
the compensation of a trustee of an express trust); (b) to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any provision of
the Agreement (including reasonable compensation and the expenses and
disbursements of its agents and counsel), except any such expense, disbursement
or advance as may be attributable to its negligence or bad faith; and (c) to
indemnify the Trustee for, and to hold it harmless against, any loss, liability
or expense incurred without negligence or bad faith on its part, arising out of
or in connection with the acceptance or administration of the Trust and its
duties thereunder, including the costs and expenses of defending itself against
any claim or liability in connection with the exercise or performance of any of
its powers or duties thereunder.
The Trustee is not obligated to expend or risk its own funds or otherwise
incur financial liability in the performance of its duties under the Agreement
if there is a reasonable ground for believing that the repayment of such funds
or adequate indemnity against such risk or liability is not reasonably assured.
The Agreement also provides that the Trustee will maintain at its expense in
Minneapolis or St. Paul, Minnesota, an office or agency where Certificates may
be surrendered for registration of transfer or exchange and where notices and
demands to or upon the Trustee and the certificate registrar and transfer agent
in respect of the Certificates pursuant to the Agreement may be served. On the
date hereof the Trustee's office for such purposes is located at 180 East Fifth
Street, St. Paul, Minnesota 55101. The Trustee will promptly give written
notice to the Company, the Servicer and the Certificateholders of any change
thereof.
The Trustee
U.S. Bank Trust National Association has its corporate trust offices at 180
East Fifth Street, St. Paul, Minnesota 55101.
S-69
<PAGE>
The Trustee may resign from its duties under the Agreement at any time, in
which event the Servicer will be obligated to appoint a successor Trustee. The
Servicer may also remove the Trustee if the Trustee ceases to be eligible to
continue as such under the Agreement or if the Trustee becomes insolvent. In
such circumstances, the Servicer will also be obligated to appoint a successor
Trustee. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the appointment
by the successor Trustee.
Registration of the Certificates
The Certificates initially will be represented by certificates registered in
the name of Cede & Co., the nominee of The Depository Trust Company ("DTC").
The interests of beneficial owners of the Certificates will be represented by
book entries on the records of the participating members of DTC. Definitive
Certificates will be available only under the limited circumstances described
herein. Holders of the Certificates may hold through DTC (in the United
States), CEDEL or Euroclear (as defined herein) (in Europe) if they are
participants of such systems, or indirectly through organizations that are
participants in such systems.
CEDEL and Euroclear will hold omnibus positions in the Certificates on behalf
of the CEDEL Participants and the Euroclear Participants, respectively, through
customers' securities accounts in CEDEL's and Euroclear's names on the books of
their respective depositaries (collectively, the "Depositaries"), which in turn
will hold such positions in customers' securities accounts in the Depositaries'
names on the books of DTC.
DTC is a limited-purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. DTC accepts securities for deposit from its participating organizations
("Participants") and facilitates the clearance and settlement of securities
transactions between Participants in such securities through electronic book-
entry changes in accounts of Participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks and trust companies and clearing corporations and may include
certain other organizations. Indirect access to the DTC system is also
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("indirect participants").
DTC management is aware that some computer applications, systems, and the
like for processing data ("Systems") that are dependent upon calendar dates,
including dates before, on, and after January 1, 2000, may encounter "Year 2000
problems." DTC has informed its Participants and other members of the financial
community (the "Industry") that it has developed and is implementing a program
so that its Systems, as the same relate to the timely payment of distributions
(including principal and income payments) to securityholders, book-entry
deliveries, and settlement of trades within DTC ("DTC Services"), continue to
function appropriately. This program includes a technical assessment and a
remediation plan, each of which is complete. Additionally, DTC's plan includes
a testing phase, which is expected to be completed within appropriate time
frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the Industry that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to:
(i) impress upon them the importance of such services being Year 2000
compliant; and (ii) determine the extent of their efforts for Year 2000
remediation (and, as appropriate, testing) of their services. In addition, DTC
is in the process of developing such contingency plans as it deems appropriate.
The beneficial owners of Certificates ("Certificate Owners") who are not
Participants but desire to purchase, sell or otherwise transfer ownership of
the Certificates may do so only through Participants (unless and until
Definitive Certificates, as defined below, are issued). In addition,
Certificate Owners will receive all
S-70
<PAGE>
distributions of principal of, and interest on, the Certificates from the
Trustee through DTC and Participants. Certificate Owners will not receive or be
entitled to receive certificates representing their respective interests in the
Certificates, except under the limited circumstances described below.
Unless and until Definitive Certificates (as defined below) are issued, it is
anticipated that the only "Certificateholder" of the Certificates will be Cede
& Co., as nominee of DTC. Certificate Owners will not be recognized by the
Trustee as Certificateholders as that term is used in the Agreement.
Certificate Owners are only permitted to exercise the rights of
Certificateholders indirectly through Participants and DTC.
While Certificates are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Certificates and
is required to receive and transmit distributions of principal of, and interest
on, the Certificates. Participants with whom Certificate Owners have accounts
with respect to Certificates are similarly required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Certificate Owners. Accordingly, although Certificate Owners will
not possess certificates, the Rules provide a mechanism by which Certificate
Owners will receive distributions and will be able to transfer their interests.
Certificates will be issued in registered form to Certificate Owners, or
their nominees, rather than to DTC (such Certificates being referred to herein
as "Definitive Certificates"), only if (i) DTC or the Company advise the
Trustee in writing that DTC is no longer willing or able to discharge properly
its responsibilities as nominee and depository with respect to the Certificates
and the Company or the Trustee is unable to locate a qualified successor or
(ii) the Company at its sole option advises the Trustee in writing that it
elects to terminate the book-entry system through DTC. Upon issuance of
Definitive Certificates to Certificate Owners, such Certificates will be
transferable directly (and not exclusively on a book-entry basis) and
registered holders will deal directly with the Trustee with respect to
transfers, notices and distributions.
DTC has advised the Company that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by a
Certificateholder under the Agreement only at the direction of one or more
Participants to whose DTC accounts the Certificates are credited. DTC has
advised the Company that DTC will take such action with respect to any
fractional interest of the Certificates only at the direction of and on behalf
of such Participants beneficially owning a corresponding fractional interest of
the Certificates. DTC may take actions, at the direction of the Participants,
with respect to some Certificates which conflict with actions taken with
respect to other Certificates.
Issuance of Certificates in book-entry form rather than as physical
certificates may adversely affect the liquidity of the Certificates in the
secondary market and the ability of Certificate Owners to pledge them. In
addition, since distributions on the Certificates will be made by the Trustee
to DTC and DTC will credit such distributions to the accounts of its
Participants, with the Participants further crediting such distributions to the
accounts of indirect participants or Certificate Owners, Certificate Owners may
experience delays in the receipt of such distributions.
Cross-market transfers between persons holding directly or indirectly through
DTC, on the one hand, and directly or indirectly through CEDEL Participants or
Euroclear Participants, on the other, will be effected in DTC in accordance
with DTC rules on behalf of the relevant European international clearing system
by its Depositary; however, such cross-market transactions will require
delivery of instructions to the relevant European international clearing system
by the counterparty in such system in accordance with its rules and procedures
and within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its Depositary to take action to effect
final settlement on its behalf by delivering or receiving securities in DTC,
and making or receiving payment in accordance with normal procedures for same-
day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
S-71
<PAGE>
Because of time-zone differences, credits of securities in CEDEL or Euroclear
as a result of a transaction with a Participant will be made during the
subsequent securities settlement processing, dated the business day following
the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant
CEDEL Participant or Euroclear Participant on such business day. Cash received
in CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant or a Euroclear Participant to a Participant will be received with
value on the DTC settlement date but will be available in the relevant CEDEL or
Euroclear cash account only as of the business day following settlement in DTC.
Cedelbank ("CEDEL") is incorporated under the laws of Luxembourg as a
professional depository. CEDEL holds securities for its participating
organizations ("CEDEL Participants") and facilitates the clearance and
settlement of securities transactions between CEDEL Participants through
electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. Transactions may be
settled in CEDEL in any of 28 currencies, including United States dollars.
CEDEL provides to its CEDEL Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. CEDEL interfaces with domestic
markets in several countries. As a professional depository, CEDEL is subject to
regulation by the Luxembourg Monetary Institute. CEDEL Participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations and may include the Underwriters. Indirect
access to CEDEL is also available to others, such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship
with a CEDEL Participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for participants
of the Euroclear System ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may now be settled in Euroclear in any of 32
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described in Annex I hereto.
The Euroclear System is operated by Morgan Guaranty Trust Company of New York,
Brussels, Belgium office (the "Euroclear Operator" or "Euroclear"), under loan
with Euroclear Clearance System, S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear Operator, not the Cooperative. The Cooperative
establishes policy for the Euroclear System on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries
and may include the Underwriters. Indirect access to the Euroclear System is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear Participants
and has no record of or relationship with persons holding through Euroclear
Participants.
S-72
<PAGE>
Distributions with respect to Certificates held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. See "Certain Federal Income Tax Consequences" in the Prospectus
and "Global Clearance, Settlement and Tax Documentation Procedures" in Annex I
to this Prospectus Supplement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Certificates among participants of DTC, CEDEL
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
S-73
<PAGE>
DESCRIPTION OF THE CLASS B-2 LIMITED GUARANTY
In order to mitigate the effect of the subordination of the Class B-2
Certificates and liquidation losses and delinquencies on the Loans, the Company
will provide a guaranty (the "Class B-2 Limited Guaranty") against losses that
would otherwise be borne by the Class B-2 Certificates. Each payment required
to be made under the Class B-2 Limited Guaranty is referred to as a "Class B-2
Guaranty Payment." Prior to the Class B-1 and B-2A Cross-over Date, and on any
Payment Date on or after the Class B-1 and B-2A Cross-over Date on which the
Class B Principal Distribution Test is not satisfied, the Class B-2 Guaranty
Payment will equal the amount, if any, by which (i) the sum of (a) the Class B-
2 Formula Distribution Amount for such Payment Date (which will be equal to
accrued and unpaid interest on the Class B-2 Certificates) and (b) the Class B-
2 Liquidation Loss Principal Amount, if any, for such Payment Date exceeds (ii)
the Class B-2 Distribution Amount for such Payment Date. The Class B-2
Liquidation Loss Principal Amount for any Payment Date equals the amount, if
any, by which the Aggregate Certificate Principal Balance exceeds the Pool
Scheduled Principal Balance for such Payment Date (but in no event greater than
the Class B-2 Principal Balance). The Class B-2 Liquidation Loss Principal
Amount is, in substance, the amount of delinquencies and losses experienced on
the Loans during the related Due Period that was not absorbed by the Class B-3I
and Class C Certificates and the related Monthly Servicing Fee otherwise
payable to the Company (so long as the Company or any wholly owned subsidiary
of the Company is the Servicer) with respect to the Loans.
The Class B-2 Limited Guaranty will be an unsecured general obligation of the
Company and will not be supported by any letter of credit or other credit
enhancement arrangement. The Class B-2 Limited Guaranty will not benefit in any
way, or result in any payment to, the Class A-1A ARM, Class A-1B ARM, Class A-
1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6 IO, Class M-1, Class
M-2, Class B-1 or Class B-2A Certificateholders.
S-74
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Certificates, Dorsey & Whitney LLP, counsel to the
Company, will deliver its opinion that, assuming that two separate elections
are made to treat segregated portions of the assets of the Trust as REMICs
(respectively, the "Master REMIC" and the "Subsidiary REMIC"), and further
assuming ongoing compliance with the terms of the Agreement, the Master REMIC
and the Subsidiary REMIC will each qualify as a REMIC, the Subsidiary REMIC
Regular Interests, which are not being offered hereunder, will be treated as
"regular interests" in the Subsidiary REMIC, and each Class of Certificates
will be treated as "regular interests" in the Master REMIC for federal income
tax purposes. The Class C Subsidiary Certificate, which is not being offered
hereby, will constitute the sole class of "residual interests" in the
Subsidiary REMIC, and the Class C Master Certificate, which is not being
offered hereby, will constitute the sole class of "residual interests" in the
Master REMIC.
Other than the Class A-6 IO Certificates, the Certificates will not be issued
with original issue discount for federal income tax purposes. Although the tax
treatment is not entirely certain, the Class A-6 IO Certificates will be
treated as having been issued with original issue discount for federal income
tax purposes equal to the excess of all expected payments of interest on such
Certificates over their issue price. The prepayment assumption that will be
used to determine the rate of accrual of original issue discount, market
discount and premium, if any, will be based on the assumption that the Loans
will prepay at a rate equal to 125% of the applicable Prepayment Assumption as
to the Fixed-Rate Loans and 30% CPR as to the Adjustable Rate Loans. Although
unclear, a holder of a Class A-6 IO Certificate may be entitled to deduct a
loss to the extent that its remaining basis exceeds the maximum amount of
future payments to which such Certificateholder would be entitled if there were
no further prepayments of the Loans.
Certificates held by financial institutions, thrift institutions taxed as
domestic building and loan associations and real estate investment trusts will
represent interests in "loans secured by an interest in real property" and
"real estate assets" for purposes of Sections 7701(a)(19)(C) and 856(c)(4)(A)
of the Code, respectively, in the same proportion that the assets in the Master
REMIC consist of qualifying assets under such sections. Furthermore, interest
paid with respect to Certificates held by a real estate investment trust will
be considered to be "interest on obligations secured by mortgages on real
property or on interests in real property" for purposes of Section 856(c)(3) of
the Code to the extent that such Certificates are treated as "real estate
assets" under Section 856(c)(4)(A) of the Code.
For further information regarding federal income tax consequences of
investing in the Certificates, see "Certain Federal Income Tax Consequences--
REMIC Series" in the Prospectus.
S-75
<PAGE>
ERISA CONSIDERATIONS
The following information supplements, and to the extent inconsistent
therewith supersedes, the information in the Prospectus under "ERISA
Considerations."
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain restrictions on employee benefit plans that are subject to
ERISA ("Plans") and on persons who are fiduciaries with respect to such Plans.
Employee benefit plans that are governmental plans (as defined in section 3(32)
of ERISA) and certain church plans (as defined in Section 3(33) of ERISA) are
not subject to ERISA requirements. Accordingly, assets of such plans may be
invested in the Class A Certificates without regard to the ERISA restrictions
described above, subject to applicable provisions of other federal and state
laws. However, any such governmental or church plan which is qualified under
section 401(a) of the Code and exempt from taxation under section 501(a) of the
Code is subject to the prohibited transaction rules set forth in section 503 of
the Code.
The U.S. Department of Labor ("DOL") has granted an administrative exemption
to Merrill Lynch, Pierce, Fenner & Smith Incorporated (Prohibited Transaction
Exemption No. 90-29; Exemption Application No. D-8012, 55 Fed. Reg. 21459
(1990)) (the "Exemption"), from certain of the prohibited transaction rules of
ERISA and the Code with respect to the initial purchase, the holding and the
subsequent resale by Plans of certificates representing interests in asset-
backed pass-through trusts that consist of certain receivables, loans and other
obligations that meet the conditions and requirements of the Exemption. The
receivables covered by the Exemption include home equity loans such as the
Loans. The Exemptions will apply to the acquisition, holding, and resale of the
Class A Certificates by a Plan, provided that specified conditions (certain of
which are described below) are met.
Among the conditions which must be satisfied for the Exemption to apply to
the Class A Certificates are the following:
(1) The acquisition of the Class A Certificates by a Plan is on terms
(including the price for the Class A Certificates) that are at least as
favorable to the Plan as they would be in an arm's-length transaction with
an unrelated party;
(2) The rights and interests evidenced by the Class A Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust;
(3) The Class A Certificates acquired by the Plan have received a
rating at the time of such acquisition that is in one of the three highest
generic rating categories from either S&P, Fitch, Duff & Phelps Credit
Rating Co. or Moody's Investors Service, Inc. (the "Exemptions Rating
Agencies");
(4) The Trustee is not an affiliate of any other member of the
Restricted Group (as defined below);
(5) The sum of all payments made to the Underwriters in connection
with the distribution of the Class A Certificates represents not more than
reasonable compensation for underwriting the Class A Certificates, as
applicable. The sum of all payments made to and retained by the Company
pursuant to the sale of the Loans to the Trust represents not more than the
fair market value of such Loans. The sum of all payments made to and
retained by the Servicer represents not more than reasonable compensation
for the Servicer's services under the Agreement and reimbursement of the
Servicer's reasonable expenses in connection therewith; and
(6) The Plan investing in the Class A Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933.
Moreover, the Exemption would provide relief from certain self-
dealing/conflict of interest prohibited transactions only if, among other
requirements, (i) in the case of the acquisition of Class A Certificates in
connection with the initial issuance, at least fifty percent (50%) of the Class
A Certificates, as applicable, are acquired by persons independent of the
Restricted Group, (ii) the Plan's investment in Class A Certificates does
S-76
<PAGE>
not exceed twenty-five percent (25%) of all of the Class A Certificates, as
applicable, outstanding at the time of the acquisition and (iii) immediately
after the acquisition, no more than twenty-five percent (25%) of the assets of
the Plan are invested in certificates representing an interest in one or more
trusts containing assets sold or serviced by the same entity. The Exemption
does not apply to Plans sponsored by the Company, the Underwriters, the
Trustee, the Servicer, any obligor with respect to Loans included in the Trust
constituting more than five percent (5%) of the aggregate unamortized principal
balance of the assets in the Trust or any affiliate of such parties (the
"Restricted Group").
On July 21, 1997, the DOL published in the Federal Register an amendment to
the Exemption, which extends exemptive relief to certain mortgage-backed and
asset-backed securities transactions using pre-funding accounts for trusts
issuing pass-through certificates. With respect to the Loan Pool, the amendment
will generally allow related Loans supporting payments to related
Certificateholders, and having a value equal to no more than 25% of the total
principal amount of the related Certificates, to be transferred to the Trust
during the Pre-Funding Period, instead of requiring that all such Loans be
either identified or transferred on or before the Closing Date. In general, the
relief applies to the purchase, sale and holding of Certificates which
otherwise qualify for the Exemption, provided that the following general
conditions are met:
(1) the ratio of the amount allocated to the Pre-Funding Account to
the total principal amount of the Certificates being offered must be less
than or equal to 25%;
(2) all Subsequent Loans transferred to the Loan Pool after the
Closing Date must meet the same terms and conditions for eligibility as the
Initial Loans, which terms and conditions have been approved by one of the
Exemptions Rating Agencies;
(3) the transfer of the Subsequent Loans to the Trust during the Pre-
Funding Period must not result in the Certificates to be covered by the
Exemption receiving a lower credit rating from an Exemptions Rating Agency
upon termination of the Pre-Funding Period than the rating that was
obtained at the time of the initial issuance of the Certificates by the
Trust;
(4) solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate (the "Average Interest Rate") for the Loan
Pool at the end of the Pre-Funding Period must not be more than 100 basis
points lower than the Average Interest Rate for the Initial Loans;
(5) for transactions occurring on or after May 23, 1997, either:
(i) the characteristics of the Subsequent Loans must be monitored
by an insurer or other credit support provider which is independent of
the Company; or
(ii) an independent accountant retained by the Company must
provide the Company with a letter (with copies provided to the
Exemptions Rating Agency rating the Certificates, the Underwriter and
the Trustee) stating whether or not the characteristics of the
Subsequent Loans conform to the characteristics described in the
Prospectus or Prospectus Supplement and/or Agreement. In preparing such
letter, the independent accountant must use the same type of procedures
as were applicable to the Initial Loans;
(6) the Funding Period must end no later than three months or 90 days
after the Closing Date or earlier in certain circumstances if the related
Pre-Funding Account falls below the minimum level specified in the
Agreement or an event of default occurs;
(7) amounts transferred to any Pre-Funding Account and any capitalized
interest account used in connection with the pre-funding may be invested
only in cash or in investments which are permitted by the Exemptions Rating
Agencies rating the Certificates, and such investment must be described in
the Agreement and must:
(i) be direct obligations of, or obligations fully guaranteed as
to timely payment of principal and interest by, the United States or
any agency or instrumentality thereof (provided that such obligations
are backed by the full faith and credit of the United States); or
S-77
<PAGE>
(ii) have been rated (or the obligor has been rated) in one of the
three highest generic rating categories by one of the Exemptions Rating
Agencies;
(8) the Prospectus or Prospectus Supplement must describe the duration
of the Funding Period; and
(9) the Trustee (or any agent with which the Trustee contracts to
provide trust services) must be a substantial financial institution or
trust company experienced in trust activities and familiar with its duties,
responsibilities and liabilities as a fiduciary under ERISA. The Trustee,
as legal owner of the Trust, must enforce all the rights created in favor
of Certificateholders of the Trust, including employee benefit plans
subject to ERISA.
In its prefatory comments to the amendment as proposed by DOL (62 Fed. Reg.
28502), the DOL stated its interpretive position that a transaction which
satisfied the conditions of the Exemption, but did not satisfy the conditions
of the amendment as proposed, could nevertheless qualify for exemptive relief
if it included a pre-funding account that was used only to acquire assets that
are specifically identified by the sponsor or originator as of the closing
date, but transferred to the trust after the closing date for administrative or
other reasons. Although the Pre-Funding Account may not satisfy the conditions
of the amendment in that the Pre-Funding Account may exceed 25% of the total
principal amount of the related Certificates, funds in the Pre-Funding Account
in excess of such 25% threshold will be used by the Trust solely to purchase
Subsequent Home Equity Loans in accordance with the Agreement from a fixed pool
of loans that will have been specifically identified prior to the Closing Date.
It is expected that all of the loans in such fixed pool, except for those which
are determined not to meet the criteria for purchase set forth in the
Agreement, will be acquired using the Pre-Funding Account. Accordingly, the
Company believes that the existence of the Pre-Funding Account should not cause
the Exemption to be inapplicable.
The Company believes that the Exemption will apply to the acquisition and
holding of Class A Certificates sold by the Underwriters and by Plans and that
all conditions of the Exemption other than those within the control of the
investors have been met. In addition, as of the date hereof, no obligor with
respect to Loans included in the Trust constitutes more than 5% of the
aggregate unamortized principal balance of the assets of the Trust. Any Plan
fiduciary who proposes to cause a Plan to purchase Class A Certificates should
consult with its own counsel with respect to the potential consequences under
ERISA and the Code of the Plan's acquisition and ownership of the Class A
Certificates. Assets of a Plan or individual retirement account should not be
invested in the Class A Certificates unless it is clear that the assets of the
Trust will not be plan assets or unless it is clear that the Exemption or a
prohibited transaction class exemption will apply and exempt all potential
prohibited transactions. See "ERISA Considerations" in the Prospectus.
In addition to the Exemption, some or all of the transactions involving the
purchase, holding and resale of Certificates that might otherwise constitute
prohibited transactions under ERISA or the Code might qualify for relief from
the prohibited transaction rules and related taxes and penalties under certain
class exemptions granted by the DOL, including Prohibited Transaction Class
Exemption ("PTCE") 83-1, which exempts certain transactions involving employee
benefit plans and mortgage pool investment trusts, PTCE 86-128, which exempts
certain transactions involving employee benefit plans and certain broker-
dealers, PTCE 90-1, which exempts certain transactions involving employee
benefit plans and insurance company pooled separate accounts, PTCE 91-38, which
exempts certain transactions involving employee benefit plans and bank
collective investment funds and PTCE 96-23, which exempts certain transactions
involving employee benefit plans and in-house asset managers. There also may be
other exemptions applicable to a particular transaction involving the Trust. A
Plan that intends to acquire any class of the Certificates should consult with
its own counsel regarding whether such investment would cause a prohibited
transaction to occur and whether the terms and conditions of an applicable
class exemption may be satisfied.
In addition to any exemption that may be available under PTCE 95-60 for the
purchase and holding of the Certificates by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides certain exemptive relief from the provisions of
Part 4 of Title I
S-78
<PAGE>
of ERISA and Section 4975 of the Code, including the prohibited transaction
restrictions imposed by ERISA and the related excise taxes imposed by the Code,
for transactions involving an insurance company general account. Pursuant to
Section 401(c) of ERISA, the DOL published proposed regulations ("Proposed
401(c) Regulations") on December 22, 1997 to provide guidance for the purpose
of determining, in cases where insurance policies supported by an insurer's
general account are issued to or for the benefit of a Plan on or before
December 31, 1998, which general account assets constitute Plan assets. Section
401(c) of ERISA generally provides that, until the date which is 18 months
after the Proposed 401(c) Regulations become final, no person will be subject
to liability under Part 4 of Title I of ERISA and Section 4975 of the Code on
the basis of a claim that the assets of an insurance company general account
constitute Plan assets, unless (i) as otherwise provided by the Secretary of
Labor in the Proposed 401(c) Regulations to prevent avoidance of the
regulations or (ii) an action is brought by the Secretary of Labor for certain
breaches of fiduciary duty which would also constitute a violation of federal
or state criminal law. Any assets of an insurance company general account which
support insurance policies issued to a Plan after December 31, 1998 or issued
to Plans on or before December 31, 1998 for which the insurance company does
not comply with the Proposed 401(c) Regulations may be treated as Plan assets.
In addition, because Section 401(c) does not relate to insurance company
separate accounts, separate account assets are still treated as Plan assets of
any Plan invested in such separate account. Insurance companies contemplating
the investment of general account assets in the Certificates should consult
with their legal counsel with respect to the applicability of Section 401(c) of
ERISA, including the general account's ability to continue to hold the
Certificates after the date which is 18 months after the date on which the
Proposed 401(c) Regulations become final.
No transfer of any Class of Certificates other than the Class A Certificates
will be permitted to be made to a Plan unless such Plan, at its expense,
delivers to the Trustee and the Company an opinion of counsel (in form
satisfactory to the Trustee and the Company) to the effect that the purchase or
holding of any other Class of Certificates by such Plan will not result in the
assets of the Trust being deemed to be "plan assets" and subject to the
prohibited transaction provisions of ERISA and the Code and will not subject
the Trustee, the Company or the Servicer to any obligation or liability in
addition to those undertaken in the Agreement. Unless such opinion is
delivered, each person acquiring such a Certificate will be deemed to represent
to the Trustee, the Company and the Servicer either (i) that such person is
neither a Plan, nor acting on behalf of a Plan, subject to ERISA or to Section
4975 of the Code or (ii) that the purchase and holding of the Certificate by
such Plan will not result in the assets of the Trust being deemed to be Plan
assets and subject to the prohibited transaction provisions of ERISA and the
Code and will not subject the Trustee, the Company or the Servicer to any
obligation or liability in addition to those undertaken in the Agreement.
S-79
<PAGE>
UNDERWRITING
The Underwriters have agreed, subject to the terms and conditions of the
Underwriting Agreement, to purchase from the Company the respective principal
amounts of the Certificates set forth opposite their names below.
<TABLE>
<CAPTION>
Principal Principal Principal Principal Principal Principal
Amount of Amount of Amount of Amount of Amount of Amount of
Class A-1A ARM Class A-1B ARM Class A-1 Class A-2 Class A-3 Class A-4
Underwriter Certificates Certificates Certificates Certificates Certificates Certificates
----------- -------------- -------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Merrill Lynch, Pierce,
Fenner & Smith
Incorporated..... $102,000,000 $102,000,000 $ 56,400,000 $ 27,000,000 $ 26,200,000 $40,460,000
Chase Securities Inc. .. 12,000,000 12,000,000 56,400,000 27,000,000 26,200,000 4,760,000
Credit Suisse First
Boston................. 12,000,000 12,000,000 56,400,000 27,000,000 26,200,000 4,760,000
First Union Capital
Markets................ 12,000,000 12,000,000 56,400,000 27,000,000 26,200,000 4,760,000
Lehman Brothers Inc. ... 12,000,000 12,000,000 56,400,000 27,000,000 26,200,000 4,760,000
------------ ------------ ------------ ------------ ------------ -----------
Totals................ $150,000,000 $150,000,000 $282,000,000 $135,000,000 $131,000,000 $59,500,000
============ ============ ============ ============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
Principal Percentage Principal Principal Principal Principal
Amount of Interest of Amount of Amount of Amount of Amount of
Class A-5 Class A-6 IO Class M-1 Class M-2 Class B-1 Class B-2A
Underwriter Certificates Certificates Certificates Certificates Certificates Certificates
----------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Merrill Lynch, Pierce,
Fenner & Smith
Incorporated..... $46,000,000 100% $14,400,000 $12,240,000 $ 8,760,000 $ 4,800,000
Chase Securities Inc. .. 5,400,000 0 14,400,000 12,240,000 8,760,000 4,800,000
Credit Suisse First
Boston................. 5,400,000 0 14,400,000 12,240,000 8,760,000 4,800,000
First Union Capital
Markets................ 5,400,000 0 14,400,000 12,240,000 8,760,000 4,800,000
Lehman Brothers Inc..... 5,400,000 0 14,400,000 12,240,000 8,760,000 4,800,000
----------- --- ----------- ----------- ----------- -----------
Totals................ $67,600,000 100% $72,000,000 $61,200,000 $43,800,000 $24,000,000
=========== === =========== =========== =========== ===========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Certificates
offered hereby if any such Certificates are purchased. In the event of a
default by the Underwriters, the Underwriting Agreement provides that, in
certain circumstances, the Underwriting Agreement may be terminated.
The Company has been advised by the Underwriters that they propose initially
to offer the Certificates to the public at the respective offering prices set
forth on the cover page of this Prospectus Supplement and to certain dealers at
such price less a concession not in excess of the respective amounts set forth
in the table below (expressed as a percentage of the relative Class Principal
Balance). The Underwriters may allow and such dealers may reallow a discount
not in excess of the respective amounts set forth in the table below to certain
other dealers.
<TABLE>
<CAPTION>
Selling Reallowance
Class Concession Discount
----- ---------- -----------
<S> <C> <C>
A-1A ARM............................ .141% .106%
A-1B ARM............................ .141% .106%
A-1................................. .105% .080%
A-2................................. .150% .113%
A-3................................. .180% .135%
A-4................................. .225% .169%
A-5................................. .231% .173%
A-6 IO.............................. .060% .045%
M-1................................. .300% .225%
M-2................................. .330% .248%
B-1................................. .360% .270%
B-2A................................ .360% .270%
</TABLE>
S-80
<PAGE>
In general, purchases of a security for the purpose of stabilization could
cause the price of the security to be higher than it might be in the absence of
such purchases.
Neither the Company nor any of the Underwriters makes any representations or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Certificates. In addition,
neither the Company nor any of the Underwriters makes any representation that
the Underwriters will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
Until the distribution of the Certificates is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Certificates. As an exception to these
rules, the Underwriters are permitted to engage in certain transactions that
stabilize the price of the Certificates. Such transactions consist of bids or
purchases for the purposes of pegging, fixing or maintaining the price of the
Certificates.
Each Underwriter has represented, warranted and agreed that (i) it has not
offered or sold and, prior to the expiration of the period of six months from
the Closing Date, will not offer or sell any Certificates to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances which
have not resulted and will not result in an offer to the public in the United
Kingdom within the meaning of the Public Offers of Securities Regulations 1995;
(ii) it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in relation to
the Certificates in, from or otherwise involving the United Kingdom; and (iii)
it has only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the issue of the
Certificates to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995
(as amended) or is a person to whom such document may otherwise lawfully be
issued or passed on.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or contribute to payments the Underwriters
may be required to make in respect thereof.
The Company has agreed that for a period of 30 days from the date of this
Prospectus Supplement it will not offer or sell publicly any other home equity
loan pass-through certificates without the consent of the Underwriters.
Each of the Underwriters (or affiliates thereof) has from time to time
provided warehouse and other financing to the Company or its affiliates.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Certificates will be
passed upon for the Company and the Trust by Dorsey & Whitney LLP Minneapolis,
Minnesota, and for the Underwriters by Thacher Proffitt & Wood, New York, New
York. The material federal income tax consequences of the Certificates will be
passed upon for the Company by Dorsey & Whitney LLP.
S-81
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Certificates will be available
only in book-entry form (the "Global Certificates"). Investors in the Global
Certificates may hold such Global Certificates through any of DTC, CEDEL or
Euroclear. The Global Certificates will be tradeable as home market instruments
in both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Certificates
through CEDEL and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Certificates
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-
payment basis through the respective Depositaries of CEDEL and Euroclear (in
such capacity) and DTC Participants.
Non-U.S. holders (as described below) of Global Certificates will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
Initial Settlement
All Global Certificates will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Certificates
will be represented through financial institutions acting on their behalf as
direct and indirect Participants in DTC. As a result, CEDEL and Euroclear will
hold positions on behalf of their participants through their respective
Depositaries, which in turn will hold such positions in accounts as DTC
Participants.
Investors electing to hold their Global Certificates through DTC will follow
the settlement practices applicable to United States corporate debt
obligations. Investors securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Certificates through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Certificates will be credited to
the securities custody accounts on the settlement date against payments in
same-day funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to book-entry
securities in same-day funds.
Trading between CEDEL or Euroclear Participants. Secondary market trading
between CEDEL Participants or Euroclear Participants will be settled using the
procedures applicable to conventional eurobonds in same-day funds.
A-1
<PAGE>
Trading between DTC seller and CEDEL or Euroclear purchaser. When Global
Certificates are to be transferred from the account of a DTC Participant to the
account of a CEDEL Participant or a Euroclear Participant, the purchaser will
send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear, as applicable, will instruct its Depositary to receive the Global
Certificates against payment. Payment will include interest accrued on the
Global Certificates from and including the last coupon payment date to and
excluding the settlement date. Payment will then be made by such Depositary to
the DTC Participant's account against delivery of the Global Certificates.
After settlement has been completed, the Global Certificates will be credited
to the applicable clearing system and by the clearing system, in accordance
with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The Global Certificates credit will appear the next day
(European time) and the cash debit will be back-valued to, and the interest on
the Global Certificates will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the CEDEL or
Euroclear cash debit will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to pre-position funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Certificates are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to pre-
position funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Certificates would incur overdraft charges for one day,
assuming they cleared the overdraft when the Global Certificates were credited
to their accounts. However, interest on the Global Certificates would accrue
from the value date. Therefore, in many cases the investment income on the
Global Certificates earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will
depend on each CEDEL Participant's or Euroclear Participant's particular cost
of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Certificates
to the respective Depositary for the benefit of CEDEL Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participant a cross-market transaction will
settle no differently than a trade between two DTC Participants.
Trading between CEDEL or Euroclear seller and DTC purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Certificates are to be transferred by the respective clearing systems, through
their respective Depositaries, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases,
CEDEL or Euroclear will instruct their respective Depositaries, as appropriate,
to deliver the Certificates to the DTC Participant's account against payment.
Payment will include interest accrued on the Global Certificates from and
including the last coupon payment date to and excluding the settlement date.
The payment will then be reflected in the account of the CEDEL Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in
the CEDEL Participant's or Euroclear Participant's account would be back-valued
to the value date (which would be the preceding day, when settlement occurred
in New York). Should the CEDEL Participant or Euroclear Participant have a line
of credit with its clearing system and elect to be in debit in anticipation of
receipts of the sale proceeds in its account, the bank-valuation will
extinguish any overdraft charges incurred over that one-day period. If
settlement is not completed on the intended value date (i.e., the trade fails),
receipt of the cash proceeds in the CEDEL Participant's or Euroclear
Participant's account would
A-2
<PAGE>
instead be valued as of the actual settlement date. Finally, day traders that
use CEDEL or Euroclear and that purchase Global Certificates from DTC
Participants for delivery to CEDEL Participants or Euroclear Participants
should note that these trades would automatically fail on the sale side unless
affirmative action were taken. At least three techniques should be readily
available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the day trade is reflected in their CEDEL or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Certificates in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give the
Global Certificates sufficient time to be reflected in their CEDEL or
Euroclear account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the CEDEL Participant
or Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Certificates holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will
be subject to the 30% U.S. withholding tax that generally applies to payments
of interest (including original issue discount) on registered debt issued by
U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its
trade or business in the chain of intermediaries between such beneficial owner
and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate:
Exemption of non-U.S. Persons (Form W-8). Beneficial owners of
Certificates that are non-U.S. Persons generally can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate
of Foreign Status) and a certificate under penalties of perjury (the "Tax
Certificate") that such beneficial owner is (i) not a controlled foreign
corporation (within the meaning of Section 957(a) of the Code) that is
related (within the meaning of Section 846(d)(4) of the Code) to the Trust
or the Transferor and (ii) not a 10% shareholder (within the meaning of
Section 871(h)(3)(B) of the Code) of the Trust or the Transferor. If the
information shown on Form W-8 or the Tax Certificate changes, a new Form W-
8 or Tax Certificate, as the case may be, must be filed within 30 days of
such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with
its conduct of a trade or business in the United States can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are beneficial owners of
Certificates residing in a country that has a tax treaty with the United
States can obtain an exemption or reduced tax rate (depending on the treaty
terms) by filing Form 1001 (Ownership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding
tax will be imposed at that rate unless the filer alternatively files Form
W-8. Form 1001 may be filed by the beneficial owner of Certificates or such
owner's agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's
Request for Taxpayer Identification Number and Certification).
A-3
<PAGE>
U.S. Federal Income Tax Reporting Procedure. The beneficial owner of a
Global Certificate or, in the case of a Form 1001 or a Form 4224 filer,
such owner's agent, files by submitting the appropriate form to the person
through whom it holds the security (the clearing agency, in the case of
persons holding directly on the books of the clearing agency). Form W-8 and
Form 1001 are effective for three calendar years and Form 4224 is effective
for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States or any political subdivision thereof (except, in the case of a
partnership, to the extent provided in regulations), (iii) an estate the income
of which is includible in gross income for United States tax purposes,
regardless of its source or (iv) a trust other than a foreign trust within the
meaning of Section 7701 (a)(31) of the Code. To the extent prescribed in
regulations by the Secretary of the Treasury, which regulations have not yet
been issued, a trust which was in existence on August 20, 1996 (other than a
trust treated as owned by the grantor under Subpart E of Part 1 of Subchapter J
of Chapter 1 of the Code), and which was treated as a United States person on
August 19, 1996, may elect to continue to be treated as a United States person
notwithstanding the previous sentence.
The provisions described above apply to payments of interest, including OID,
on registered debt made on or before December 31, 1999. New withholding rules
and exemptions will apply to such payments made on or after January 1, 2000.
This summary does not deal with all aspects of U.S. federal income tax
withholding that may be relevant to foreign holders of the Global Certificates.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Certificates.
A-4
<PAGE>
Green Tree Financial Corporation, Seller and Servicer
Certificates for Home Equity Loans
(Issuable In Series)
We are offering certificates for home equity loans under this Prospectus and
a prospectus supplement. The prospectus supplement will be prepared separately
for each series of certificates offered. We refer to the certificates for home
equity loans as "Certificates" and to each separate series of Certificates as a
"Series." Green Tree Financial Corporation will form a trust for each Series,
and the trust will issue the Certificates of that Series. The Certificates of
any Series may comprise several different classes. A trust may also issue one
or more other interests in the trust that will not be offered under this
Prospectus.
The right of each class of Certificates within a Series to receive payments
may be senior or subordinate to the rights of one or more of the other classes
of Certificates. In addition, a Series of Certificates may include one or more
classes which on the one hand are subordinated to one or more classes of
Certificates, while on the other hand are senior to one or more classes of
Certificates. The rate of principal and interest payment on the Certificates of
any class will depend on the priority of payment of that class and the rate and
timing of payments of the related home equity loans.
----------------
The Certificates will represent obligations of the related trust and will not
represent any interest in or obligation of Green Tree Financial Corporation or
any of its affiliates.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
----------------
This Prospectus may not be used to consummate sales of any Certificates
unless accompanied by the prospectus supplement relating to that Series.
Prospectus dated February 23, 1999.
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS AND THE
ACCOMPANYING PROSPECTUS SUPPLEMENT
We tell you about the Certificates in two separate documents that
progressively provide more detail: (a) this Prospectus, which provides general
information, some of which many not apply to a particular Series of
Certificates, including your Series; and (b) the prospectus supplement related
to the particular terms of your Series of Certificates.
If the terms of your Series of Certificates described in the prospectus
supplement varies from this Prospectus, you should rely on the information in
your prospectus supplement.
You should rely only on the information contained in this document or
information to which we have referred you. We have not authorized anyone to
provide you with information that is different. This document may only be used
where it is legal to sell these securities. The information in this document
may only be accurate on the date of this document.
Some persons participating in this offering may engage in transactions that
stabilize, maintain or in some way affect the price of the Certificates. These
types of transactions may include stabilizing, the purchase of Certificates to
cover syndicate short positions and the imposition of penalty bids. For a more
complete description of these activities, please read the section entitled
"Underwriting" in your prospectus supplement.
REPORTS TO HOLDERS OF THE CERTIFICATES
We will provide to the holders of the Certificates of each Series certain
monthly and annual reports concerning the Certificates and the related trust
fund. For a more complete description of the reports you will receive, please
read the section entitled "Description of the Certificates--Reports to
Certificateholders."
WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires the filing of certain information with the
Securities and Exchange Commission (the "SEC"), including annual, quarterly and
special reports, proxy statements and other information. You can read and copy
these documents at the public reference facility maintained by the SEC at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. You
can also read and copy such reports, proxy statements and other information at
the following regional offices of the SEC:
New York Regional Office Chicago Regional Office
Seven World Trade Center Citicorp Center
Suite 1300 500 West Madison Street, Suite
New York, NY 10048 1400
Chicago, IL 60661
Please call the SEC at 1-800-SEC-0330 for more information about the public
reference rooms or visit the SEC's web site at http://www.sec.gov to access
available filings.
The SEC allows us to "incorporate by reference" some of the information we
file with it, which means that we can disclose important information to you by
referring you to those documents. The information that we incorporate by
reference is considered to be part of this Prospectus, and later information
that we file with the SEC will automatically update and supersede this
information.
All documents filed by the Servicer, on behalf of any trust, pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), after the date of this Prospectus and prior to
the termination of the offering of the Certificates issued by that trust, will
be incorporated by reference into this Prospectus.
2
<PAGE>
SUMMARY OF THE TERMS OF THE CERTIFICATES
This summary highlights selected information regarding the Certificates, and
does not contain all of the information that you need to consider in making
your investment decision. To understand all of the terms of the Certificates,
read this entire Prospectus and the accompanying prospectus supplement.
Title of Securities.......... We call the securities Certificates for Home Eq-
uity Loans.
Securities Offered .......... Green Tree Financial Corporation will create a
trust and deposit a pool of loans in the trust.
The trust will issue the Certificates. This
Prospectus describes multiple trusts that Green
Tree Financial Corporation will create from time
to time. Each trust will issue a separate Series
of Certificates. Payments on the Certificates
will be made primarily from payments on the
related pool of loans. The terms of the
Certificates issued by a trust will be governed
by a Pooling and Servicing Agreement between
Green Tree Financial Corporation and the trustee
for that Series. We will identify the trustee
for a Series of Certificates in the related
prospectus supplement.
Seller and Servicer.......... Green Tree Financial Corporation, 1100 Landmark
Towers, 345 St. Peter Street, St. Paul,
Minnesota 55102, telephone: (651) 293-3400.
Risk Factors................. There are special considerations that are
important to a decision to invest in the
Certificates. You should read carefully the
section entitled "Risk Factors" beginning on
page 6 of this Prospectus.
The Loans.................... The loans underlying a Series of Certificates
form a loan pool. The loans in a loan pool will
be fixed or variable rate loans. All of the
loans will be closed-end home equity loans. Each
loan will be secured by the related real estate.
The prospectus supplement for each Series will
provide information about the following:
- the aggregate principal balance of the
loans comprising the loan pool, as of a
date specified in the prospectus
supplement;
- the weighted average and range of
contractual rates of interest on the loans;
- the weighted average and ranges of terms to
scheduled maturity of the loans as of
origination and as of the cut-off date;
- the average outstanding principal balance
of the loans as of the cut-off date;
- the range of loan-to-value ratios; and
- the geographic location of improved real
estate underlying the loans.
3
<PAGE>
If we so specify in the related prospectus
supplement, the trust may purchase from Green
Tree Financial Corporation additional loans
after the date of issuance of that Series from
funds on deposit in a pre-funding account.
The loans will have been originated by Green
Tree Financial Corporation on an individual
basis in the ordinary course of its business,
unless we specify otherwise in the related
prospectus supplement.
Description of
Certificates................ The trust will issue the Certificates of the
related Series of Certificates on the terms
specified in the related prospectus supplement.
Each Series of Certificates will evidence an
interest in the loan pool and other property
held in trust for the benefit of
certificateholders. If we so specify in the
related prospectus supplement, a Series of
Certificates may include one or more classes
with different rights to payments of principal
and interest, including classes which:
- are entitled to receive only distributions
of interest,
- are entitled to receive only distributions
of principal,
- are entitled to receive principal on a
planned amortization schedule or a targeted
amortization schedule, or
- are entitled to receive principal only
after other classes have received a
specified amount of principal.
We will issue the Certificates in fully
registered form in the authorized denominations
that we specify in the related prospectus
supplement. No government agency or other
insurer will guarantee or insure the
Certificates, unless we otherwise specify in the
related prospectus supplement. Similarly, no
government agency or other insurer will
guarantee or insure the loans, except as we
specify in this Prospectus and in the related
prospectus supplement.
Subordinated Certificates.... We may subordinate one or more classes of any
Series of Certificates, as specified in the
related prospectus supplement. The rights of
holders of subordinated Certificates to receive
any or a portion of distributions with respect
to the loans will be subordinated to the rights
of holders of senior Certificates to the extent
and in the manner we specify in the related
prospectus supplement. If a Series of
Certificates contains more than one class of
subordinated Certificates, distributions and
losses will be allocated among those classes in
the manner specified in the related prospectus
supplement. The rights of holders of
subordinated Certificates, to the extent not
subordinated, may be on a parity with holders of
senior Certificates. By subordinating a class of
Certificates, we intend to:
4
<PAGE>
- enhance the likelihood of regular receipt
by holders of senior Certificates of the
full amount of scheduled monthly payments
of principal and interest due them, and
- protect holders of senior Certificates
against losses.
If we so specify in the applicable prospectus
supplement, we may entitle some classes of sub-
ordinated Certificates the benefits of other
forms of credit enhancement that would benefit
only those subordinated Certificates.
Credit Enhancement........... As an alternative, or in addition, to the credit
enhancement afforded by subordination of the
subordinated Certificates, we may provide credit
enhancement with respect to a Series of
Certificates by pool insurance, letters of
credit, surety bonds, a guarantee of Green Tree
Financial Corporation, cash reserve funds or
other forms of enhancement acceptable to each
nationally recognized rating agency rating a
Series of Certificates. We will describe any
such credit enhancement in the related
prospectus supplement.
Interest..................... We will pay interest on the Certificates on the
dates specified in the related prospectus
supplement, unless we indicate otherwise. The
related prospectus supplement will describe the
pass-through rate, if any, for each class or the
method of determining the pass-through rate.
This rate may be fixed, variable or adjustable,
as specified in the related prospectus
supplement. For a more complete description of
interest payable on the Certificates, see "Yield
Considerations" and "Description of the
Certificates" in this Prospectus. As we specify
in the related prospectus supplement, classes of
a Series of Certificates may not be entitled to
receive interest or may be entitled to receive
interest which is not proportionate to the
principal allocable to such Certificates.
Principal (Including
Prepayments)................ Principal on each loan, including any principal
prepayments, will be passed through on each
payment date, except as we otherwise describe in
the related prospectus supplement. For a more
complete description of principal on the
Certificates, see "Maturity and Prepayment
Considerations" and "Description of the
Certificates" in this Prospectus.
Optional Termination......... Unless we specify otherwise in the related
prospectus supplement, Green Tree Financial
Corporation may repurchase all the loans
relating to a Series of Certificates remaining
outstanding at the time and under the
circumstances we specify in the related
prospectus supplement. Unless we otherwise
provide in the related prospectus supplement,
the repurchase price will equal the principal
amount of the loans plus accrued and unpaid
interest. For a more complete description of
optional termination of the Certificates, see
"Description of the Certificates--Termination of
the Agreement" in this Prospectus.
5
<PAGE>
Representations and
Warranties of Green Tree
Financial Corporation ....... Green Tree Financial Corporation will make
certain representations and warranties regarding
the loans. These representations and warranties
are a condition to Green Tree Financial
Corporation's conveyance of any loan pool to the
trust fund. If Green Tree Financial Corporation
becomes aware of a breach of any representation
or warranty that materially adversely affects
the trust fund's interest in any loan or
receives written notice of a breach from the
trustee or the Servicer, then Green Tree
Financial Corporation must either cure the
breach, repurchase the affected loan or, if the
related prospectus supplement so provides,
substitute for the affected loan, under the
conditions further described in this Prospectus
and in the prospectus supplement. For a more
complete description of the representations and
warranties of Green Tree Financial Corporation,
see "Description of the Certificates--Conveyance
of Loans."
Federal Income Tax
Considerations.............. We may make an election to treat the trust fund
represented by a Series of Certificates or a
segregated portion of them as a real estate
mortgage investment conduit ("REMIC") under the
Internal Revenue Code of 1986, as amended. If we
so choose, the Classes of Certificates that we
offer may constitute "regular interest" or
"residual interests" in that REMIC under the
Internal Revenue Code of 1986, as amended, with
the tax consequences described in this
Prospectus and in the related prospectus
supplement. If we so specify in the prospectus
supplement, a Class of Certificates that we are
offering may represent interests in a "two-tier"
REMIC, but all interest in the first and second
tier REMIC will be created under the Pooling and
Servicing Agreement.
If we do not make a REMIC election with respect
to a Series of Certificates, the trust fund
represented by those Certificates may be treated
as a grantor trust for federal income tax
purposes and not as an association taxable as a
corporation. In such an event, each holder of a
Certificate will be treated as the owner of an
undivided pro rata interest in income and corpus
attributable to the related loan pool and any
other assets held by the Trust Fund and will be
considered the equitable owner of an undivided
interest in the loans included in such loan
pool. If we do not make a REMIC election with
respect to a Series of Certificates and the
Trust Fund represented by such Certificates will
not be treated as a grantor trust, the federal
income tax consequences of owning such
Certificates will be described in the related
prospectus supplement. For a more complete
description of the Federal income tax
considerations related to the Certificates, see
"Certain Federal Income Tax Consequences--Non-
REMIC Series."
6
<PAGE>
ERISA Considerations......... If you are a fiduciary of any employee benefit
plan subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") or
the Internal Revenue Code of 1986, as amended,
you should review carefully with your legal
advisors whether the purchase or holding of
Certificates could give rise to a transaction
prohibited or otherwise impermissible under
ERISA or the Internal Revenue Code of 1986, as
amended. For a more complete description of
ERISA considerations, see "ERISA Considerations"
in this Prospectus and in your prospectus
supplement.
Legal Investment............. Unless the related prospectus supplement
indicates otherwise, the Certificates will not
constitute "mortgage related securities" under
the Secondary Mortgage Market Enhancement Act of
1984, as amended. For a more complete
description of legal considerations regarding
investment in the Certificates, see "Legal
Investment Considerations" in this Prospectus
and in your prospectus supplement.
Ratings...................... We will not issue the Certificates unless one or
more nationally recognized rating agencies have
assigned a rating to the Certificates in one of
their four highest rating categories.
The rating of each Series of Certificates
addresses the likelihood of the timely receipt
of interest and payment of principal on that
Series on or before the stated maturity date for
that Series. A rating is not a recommendation to
buy, sell or hold securities and may be subject
to revision or withdrawal at any time by the
assigning rating agency. The ratings of the
Certificates do not address the likelihood of
payment of principal on any Series of
Certificates prior to the stated maturity date
or the possibility of the imposition of United
States withholding tax with respect to non-
United States persons. For a more complete
description of the ratings of the Certificates,
see "Ratings" in this Prospectus and in your
prospectus supplement.
7
<PAGE>
RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase the Certificates.
- Limited Obligations. Unless we specify otherwise in the related
prospectus supplement, the Certificates will not represent an interest
in or obligation of Green Tree Financial Corporation. Neither the
government, any underwriter or its affiliates, the Servicer nor any
other party will insure or guarantee any of the Certificates of any
Series (except as we otherwise specify in the related prospectus
supplement).
- Junior Mortgage Liens; Value of Mortgaged Property. Green Tree
Financial Corporation expects that a substantial number of the liens on
improved real estate securing the loans in a given loan pool will be
junior to other liens on that real estate. This subordinates the rights
of the trust fund (and consequently the holders of Certificates of the
related Series), as beneficiary under a conventional junior deed of
trust or as mortgagee under a conventional junior mortgage, to those of
the mortgagee or beneficiary under the senior mortgage or deed of
trust, including the prior rights of the senior mortgagee or
beneficiary to cause the property securing the loan to be sold upon
default of the mortgagor or trustor. This extinguishes the junior
mortgagee's or junior beneficiary's lien unless the Servicer on behalf
of the trust fund asserts its subordinate interest in the property in
foreclosure litigation and, possibly, satisfies the defaulted senior
loan or loans. For a more complete description of the risks associated
with junior mortgage liens, see "Certain Legal Aspects of the Loans--
Repurchase Obligations."
We expect a substantial portion of the loans included in a loan pool to
have loan-to-value ratios of 90% or more, based on the total of the
outstanding principal balances of all senior mortgages or deeds of
trust and of the loan an the one hand, and the value of the home, on
the other. For a more complete description, see "Green Tree Financial
Corporation--Loan Origination." An overall decline in the residential
real estate market, the general condition of a property securing a loan
or other factors could adversely affect the value of the property
securing a loan. As a result, the remaining balance of that loan,
together with that of any senior liens on the related property, could
equal or exceed the value of the property.
- Limited Liquidity. We cannot assure to you that a secondary market will
develop for the Certificates of any Series, or, if a secondary market
does develop, that it will provide the holders of any of the
Certificates with liquidity of investment. We also cannot assure to you
that if a secondary market does develop, that it will continue to exist
for the term of any Series of Certificates.
- Non-recordation of Mortgage Assignments. Green Tree Financial
Corporation will not record the assignment to the trustee of the
mortgage or deed of trust securing any loan, because of the expense and
administrative inconvenience involved. In some states, in the absence
of a recordation, the assignment to the related trustee of the mortgage
or deed of trust securing a loan may not be effective against creditors
of or purchasers from Green Tree Financial Corporation or a trustee in
bankruptcy of Green Tree Financial Corporation.
- Certain Matters Relating to Insolvency. Green Tree Financial
Corporation intends that each transfer of loans to the related trust
fund will constitute a sale, rather than a pledge of the loans to
secure indebtedness of Green Tree Financial Corporation. However, if
Green Tree Financial Corporation were to become a debtor under the
federal bankruptcy code, it is possible that a creditor or trustee in
bankruptcy of Green Tree Financial Corporation, or Green Tree Financial
Corporation as debtor-in-possession, may argue that the sale of the
loans by Green Tree Financial Corporation was a pledge of the loans
rather than a sale. This position, if presented to or accepted by a
court, could result in a delay in or reduction of distributions to the
holders of the Certificates.
8
<PAGE>
THE TRUST FUND
General
A trust find (the "Trust Find") will evidence the interest specified in the
related Prospectus Supplement in the Loan Pool (as defined below) and certain
other property held in trust for the benefit of the Certificateholders (as
defined below). Each Trust Fund will include (i) closed-end home equity Loans
(the "loans") underlying a series of Certificates (the "Loan Pool"), (ii) the
amounts held from time to time in a trust account (the "Certificate Account")
maintained by the trustee (the "Trustee") pursuant to separate Pooling and
Servicing Agreements (each, an "Agreement"), (iii) any letter of credit,
guarantee, surety bond, insurance policy, cash reserve fund or other credit
enhancement securing payment of all or part of a series (each, a "Series") of
Certificates for Home Equity Loans ("Certificates"), and (iv) such other
property as may be specified in the related prospectus supplement (the
"Prospectus Supplement").
Each Certificate will evidence the interest specified in the related
Prospectus Supplement in one Trust Fund, containing one Loan Pool comprised of
Loans having the aggregate principal balance as of the specified day of the
month of the creation of the pool (the "Cut-off Date") specified in the related
Prospectus Supplement. Holders of Certificates of a Series will have interests
only in such Loan Pool and will have no interest in the Loan Pool created with
respect to any other Series of Certificates. If so specified in the related
Prospectus Supplement, the Trust Fund may include funds on deposit in a pre-
funding account (a "Pre-Funding Account") which would be used to purchase
additional Loans ("Subsequent Loans") from the Company during the pre-funding
period specified in the related Prospectus Supplement (the "Pre-Funding
Period"). The related Prospectus Supplement will specify the conditions that
must be satisfied prior to any transfer of Subsequent Loans, including the
requisite characteristics of the Subsequent Loans.
Except as otherwise specified in the related Prospectus Supplement, all of
the Loans will have been originated by the Company in the ordinary course of
its business. Specific information respecting the Loans included in each Trust
Fund will be provided in the related Prospectus Supplement and, to the extent
not contained in the related Prospectus Supplement, in a report on Form 8-K to
be filed with the Commission within fifteen days after the initial issuance of
the Certificates. A copy of the Agreement with respect to each Series of
Certificates will be attached to the Form 8-K and will be available for
inspection at the corporate trust office of the Trustee specified in the
related Prospectus Supplement. A schedule of the Loans relating to such Series
will be attached to the Agreement delivered to the Trustee upon delivery of the
Certificates.
Whenever in this Prospectus terms such as "Loan Pool," "Trust Fund,"
"Agreement" or "Pass-Through Rate" are used, those terms respectively apply,
unless the context otherwise indicates, to one specific Loan Pool and Trust
Fund, each Agreement and each Pass-Through Rate applicable to the related Class
of Certificates.
The Loan Pools
Except as otherwise specified in the related Prospectus Supplement, the Loan
Pool will consist of the Loans, originated by the Company on an individual
basis in the ordinary course of business. All Loans will be secured by the
related real estate. Except as otherwise specified in the related Prospectus
Supplement, the Loans will be fully amortizing and will bear interest at a
fixed or variable annual percentage rate (the "Loan Rate").
For each Series of Certificates, the Company will assign the Loans
constituting the Loan Pool to the Trustee named in the related Prospectus
Supplement. The Company, as Servicer (in such capacity referred to herein as
the "Servicer", which term shall include any successor to the Company in such
capacity under the applicable Agreement), will service the Loans pursuant to
the Agreement. See "Description of the Certificates--Servicing." Unless
otherwise specified in the related Prospectus Supplement, the Loan documents
will be held by the Trustee or a custodian on its behalf.
9
<PAGE>
Each Loan Pool will be composed of Loans bearing interest at the Loan Rates
specified in the Prospectus Supplement. Unless otherwise stated in the related
Prospectus Supplement, each registered holder of a Certificate will be entitled
to receive periodic distributions, which will be monthly unless otherwise
specified in the related Prospectus Supplement, of all or a portion of
principal on the underlying Loans or interest on the principal balance of such
Certificate (or on some other principal balance unrelated to that of such
Certificate) at the pass-through rate (the "Pass-Through Rate"), or both. The
Prospectus Supplement will set forth the rate at which interest will be paid to
Certificateholders of each Class of a given Series. Such Pass-Through Rate may
be fixed, variable or adjustable, as specified in the related Prospectus
Supplement.
The related Prospectus Supplement will specify for the Loans contained in the
related Loan Pool, among other things, the range of the dates of origination of
the Loans; the range of the Loan Rates and the weighted average Loan Rate; the
minimum and maximum outstanding principal balances and the average outstanding
principal balance as of the Cut-off Date; the aggregate principal balance of
the Loans included in the Loan Pool as of the Cut-off Date; the weighted
average and range of scheduled terms to maturity as of origination and as of
the Cut-off Date; the range of original maturities of the Loans and the last
maturity date of any Loan; and the geographic location of improved real estate
securing the Loans. If the Trust Fund includes a Pre-Funding Account, the
related Prospectus Supplement will specify the conditions that must be
satisfied prior to any transfer of Subsequent Loans, including the requisite
characteristics of the Subsequent Loans.
Green Tree Financial Corporation (in its capacity as the Seller, the
"Company") will make representations and warranties as to the types and
geographical distribution of the Loans included in a Loan Pool and as to the
accuracy in all material respects of certain information furnished to the
Trustee in respect of each such Loan. Upon a breach of any representation or
warranty that materially and adversely affects the interests of the
Certificateholders in a Loan, the Company will be obligated to cure the breach
in all material respects, or to repurchase or substitute for the Loan as
described below. This repurchase obligation constitutes the sole remedy
available to the Certificateholders or the Trustee for a breach of
representation or warranty by the Company. See "Description of the
Certificates--Conveyance of Loans."
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of each
Series of Certificates will be used by the Company for general corporate
purposes, including the origination or acquisition of additional home equity
loans, costs of carrying such loans until sale of the related certificates and
to pay other expenses connected with pooling the Loans and issuing the
Certificates.
GREEN TREE FINANCIAL CORPORATION
General
The Company is a Delaware corporation which, as of December 31, 1997, had
stockholders' equity of approximately $1,332,000,000. The Company purchases,
pools, sells and services conditional sales contracts for manufactured homes
and other consumer installment sales contracts, as well as home equity loans.
The Company is the largest servicer of government-insured manufactured housing
contracts and conventional manufactured housing contracts in the United States.
Servicing functions are performed through Green Tree Financial Servicing
Corporation, a wholly owned subsidiary of the Company. Through its principal
offices in St. Paul, Minnesota, and service centers throughout the United
States, the Company serves all 50 states. The Company began financing home
equity loans in January 1996. The Company also purchases, pools and services
installment sales contracts for various consumer products. The Company's
principal executive offices are located at 1100 Landmark Towers, 345 St. Peter
Street, St. Paul, Minnesota 55102-1639 (telephone (651) 293-3400). The
Company's quarterly and annual reports are available from the Company upon
written request made to the Company.
10
<PAGE>
Loan Origination
The Company has originated closed-end home equity loans since January 1996.
As of December 31, 1997, the Company had approximately $3,116,054,406 aggregate
principal amount of outstanding closed-end home equity loans.
Through a system of regional offices, the Company markets its home equity
lending directly to consumers using a variety of marketing techniques. The
Company also reviews and re-underwrites loan applications forwarded by
correspondent lenders.
The Company's credit approval process analyzes both the equity position of
the requested loan (including both the priority of the lien and the combined
loan-to-value ratio) and the applicant's creditworthiness; to the extent the
requested loan would have a less favorable (or more favorable) equity position,
the creditworthiness of the borrower must be stronger (or may be weaker). The
loan-to-value ratio of the requested loan, combined with any existing loans
with a senior lien position, may not exceed 95% without senior management
approval. In most circumstances, an appraisal of the property is required.
Currently, loans secured by a first mortgage with an obligor having a superior
credit rating may not exceed $300,000 without senior management approval, and
loans secured by a second mortgage with an obligor having a superior credit
rating may not exceed $250,000 without senior management approval.
YIELD CONSIDERATIONS
The Pass-Through Rates and the weighted average and range of contractual
rates of interest (each, a "Loan Rate") of the Loans (as of the related Cut-off
Date) relating to each Series of Certificates will be set forth in the related
Prospectus Supplement.
The Prospectus Supplement for each Series will indicate that a lower rate of
principal prepayments than anticipated would negatively affect the total return
to investors of any Class of Certificates that is offered at a discount to its
principal amount, and a higher rate of principal prepayments than anticipated
would negatively affect the total return to investors of any such Class of
Certificates that is offered at a premium to its principal amount or without
any principal amount.
The yield on some types of Certificates which may be offered hereby, such as
Interest Only Certificates, Principal Only Certificates, and Fast Pay/Slow Pay
Certificates, may be particularly sensitive to prepayment rates, and to changes
in prepayment rates, on the underlying Loans. If so stated in the related
Prospectus Supplement, the yield on some types of Certificates which may be
offered hereby could change and may be negative under certain prepayment rate
scenarios. Accordingly, some types of Certificates may not be legal or
appropriate investments for certain financial institutions, pension funds or
others. See "ERISA Considerations" and "Legal Investment Considerations." In
addition, the timing of changes in the rate of prepayment on the Loans included
in a Loan Pool may significantly affect an investor's actual yield to maturity,
even if the average prepayment rate over time is consistent with the investor's
expectations. In general, the earlier that prepayments on Loans occur, the
greater the effect on the investor's yield to maturity.
MATURITY AND PREPAYMENT CONSIDERATIONS
Maturity
Unless otherwise described in an applicable Prospectus Supplement, all of the
Loans will have maturities at origination of not more than 25 years.
11
<PAGE>
Prepayment Considerations
Loans generally may be prepaid in full or in part without penalty. The
Company has no significant experience with respect to the rate of principal
prepayments on home equity loans. Because the Loans have scheduled due dates
throughout the calendar month, and because (unless otherwise specified in the
related Prospectus Supplement) all principal prepayments will be passed through
to Certificateholders of the related Series on the Payment Date following the
Due Period in which such principal prepayment occurred, prepayments on the
Loans would affect the amount of funds available to make distributions on the
Certificates on any Payment Date only if a substantial portion of the Loans
prepaid prior to their respective due dates in a particular month (thus paying
less than 30 days' interest for that Due Period) while very few Loans prepaid
after their respective due dates in that month. In addition, liquidations of
defaulted Loans or the Servicer's or the Company's exercise of its option to
repurchase the entire remaining pool of Loans (see "Description of the
Certificates--Repurchase Option") will affect the timing of principal
distributions on the Certificates of a Series.
Information regarding the prepayment standard or model or any other rate of
assumed prepayment, as applicable, will be set forth in the Prospectus
Supplement with respect to a Series of Certificates. Although the related
Prospectus Supplement will specify the prepayment assumptions used to price any
Series of Certificates, there can be no assurance that the Loans will prepay at
such rate, and it is unlikely that prepayments or liquidations of the Loans
will occur at any constant rate.
See "Description of the Certificates--Repurchase Option" for a description of
the Company's or Servicer's option to repurchase the Loans comprising part of a
Trust Fund when the aggregate outstanding principal balance of such Loans is
less than a specified percentage of the initial aggregate outstanding principal
balance of such Loans as of the related Cut-off Date. See also "The Trust
Fund--The Loan Pools" for a description of the obligations of the Company to
repurchase a Loan in case of a breach of a representation or warranty relative
to such Loan.
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to an Agreement to be
entered into among the Company, as seller and Servicer, and the Trustee named
in the related Prospectus Supplement, and such other parties, if any, as are
described in the applicable Prospectus Supplement. The following summaries
describe certain provisions expected to be common to each Agreement and the
related Certificates, but do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, the provisions of the related
Agreement and the description set forth in the related Prospectus Supplement.
The provisions of the form of Agreement filed as an exhibit to the Registration
Statement of which this Prospectus is a part (the "Registration Statement")
that are not described herein may differ from the provisions of any actual
Agreement. The material differences will be described in the related Prospectus
Supplement. Capitalized terms used herein and not otherwise defined herein
shall have the meanings assigned to them in the form of Agreement filed as an
exhibit to the Registration Statement.
Each Series of Certificates will have been rated in the rating category by
the rating agency or agencies specified in the related Prospectus Supplement.
General
The Certificates may be issued in one or more Classes. If the Certificates of
a Series are issued in more than one Class, the Certificates of all or less
than all of such Classes may be sold pursuant to this Prospectus, and there may
be separate Prospectus Supplements relating to one or more of such Classes so
sold. Any reference herein to the Prospectus Supplement relating to a Series
comprised of more than one Class should be understood as a reference to each of
the Prospectus Supplements relating to the Classes sold hereunder. Any
12
<PAGE>
reference herein to the Certificates of a Class should be understood to refer
to the Certificates of a Class within a Series or all of the Certificates of a
single-Class Series, as the context may require. For convenience of
description, any reference in this Prospectus to a "Class" of Certificates
includes a reference to any subclasses of such Class.
The Certificates of each Series will be issued in fully registered form only
and will represent the interests specified in the related Prospectus Supplement
in a separate Trust Fund created pursuant to the related Agreement. The Trust
Fund will be held by the Trustee for the benefit of the Certificateholders.
Each Trust Fund, to the extent specified in the related Prospectus Supplement,
will include (i) Loans (the "Loan Pool") which are subject to the Agreement,
(ii) the amounts held in the Certificate Account from time to time, (iii) any
letter of credit, guarantee, surety bond, insurance policy, cash reserve fund
or other credit enhancement securing payment of all or part of a Series of
Certificates and (iv) such other property as may be specified in the related
Prospectus Supplement. Except as otherwise specified in the related Prospectus
Supplement, the Certificates will be freely transferable and exchangeable at
the corporate trust office of the Trustee at the address set forth in the
related Prospectus Supplement. No service charge will be made for any
registration of exchange or transfer of Certificates, but the Trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge.
Ownership of each Loan Pool may be evidenced by one or more Classes of
Certificates, each representing the interest in the Loan Pool specified in the
related Prospectus Supplement. Each Series of Certificates may include one or
more Classes ("Subordinated Certificates") which are subordinated in right of
distribution to one or more other Classes ("Senior Certificates"), as provided
in the related Prospectus Supplement. Certificates of a Series which includes
Senior and Subordinated Certificates are referred to herein collectively as
"Senior/Subordinated Certificates." A Series of Senior/Subordinated
Certificates may include one or more Classes ("Mezzanine Certificates") which
are subordinated to one or more Classes of Certificates and are senior to one
or more Classes of Certificates. The Prospectus Supplement with respect to a
Series of Senior/Subordinated Certificates will set forth, among other things,
the extent to which the Subordinated Certificates are subordinated (which may
include a formula for determining the subordinated amount or for determining
the allocation of the Amount Available (hereinafter defined) among Senior
Certificates and Subordinated Certificates), the allocation of losses among the
Classes of Subordinated Certificates, the period or periods of such
subordination, the minimum subordinated amount, if any, and any distributions
or payments which will not be affected by such subordination. The protection
afforded to the Senior Certificateholders from the subordination feature
described above will be effected by the preferential right of such
Certificateholders to receive current distributions from the Loan Pool. If a
Series of Certificates contains more than one Class of Subordinated
Certificates, losses will be allocated among such Classes in the manner
described in the Prospectus Supplement. If so specified in the applicable
Prospectus Supplement, Mezzanine Certificates or other Classes of Subordinated
Certificates may be entitled to the benefits of other forms of credit
enhancement and may, if rated in one of the four highest rating categories by a
nationally recognized statistical rating organization, be offered pursuant to
this Prospectus and such Prospectus Supplement.
If so specified in a Prospectus Supplement, a Series of Certificates may
include one or more Classes which (i) are entitled to receive distributions
only in respect of principal ("Principal Only Certificates"), interest
("Interest Only Certificates") or any combination thereof, or in specified
proportions in respect of such payments, and/or (ii) are entitled to receive
distributions in respect of principal before or after specified principal
distributions have been made on one or more other Classes within such Series
("Fast Pay/Slow Pay Certificates"), or on a planned amortization schedule ("PAC
Certificates") or targeted amortization schedule ("TAC Certificates") or upon
the occurrence of other specified events. The Prospectus Supplement will set
forth the rate at which interest will be paid to Certificateholders of each
Class of a given Series (the "Pass-Through Rate"). Such Pass-Through Rate may
be fixed, variable or adjustable, as specified in the related Prospectus
Supplement.
The related Prospectus Supplement will specify the minimum denomination or
initial principal amount of Loans evidenced by a single Certificate of each
Class of Certificates of a Series (a "Single Certificate").
13
<PAGE>
Distributions of principal and interest on the Certificates will be made on
the payment dates set forth in the related Prospectus Supplement (each, a
"Payment Date") to the persons in whose names the Certificates are registered
at the close of business on the related record date specified in the related
Prospectus Supplement (the "Record Date"). Distributions will be made by check
mailed to the address of the person entitled thereto as it appears on the
Certificate Register, or, to the extent described in the related Prospectus
Supplement, by wire transfer, except that the final distribution in retirement
of Certificates will be made only upon presentation and surrender of the
Certificates at the office or agency of the Trustee specified in the final
distribution notice to Certificateholders.
Global Certificates
The Certificates of a Class may be issued in whole or in part in the form of
one or more global certificates (each, a "Global Certificate") that will be
deposited with, or on behalf of, and registered in the name of a nominee for, a
depositary (the "Depositary") identified in the related Prospectus Supplement.
The description of the Certificates contained in this Prospectus assumes that
the Certificates will be issued in definitive form. If the Certificates of a
Class are issued in the form of one or more Global Certificates, the term
"Certificateholder" should be understood to refer to the beneficial owners of
the Global Certificates, and the rights of such Certificateholders will be
limited as described under this subheading.
Global Certificates will be issued in registered form. Unless and until it is
exchanged in whole or in part for a Certificate in definitive form, a Global
Certificate may not be transferred except as a whole by the Depositary for such
Global Certificate to a nominee of such Depositary or by a nominee of such
Depositary to such Depositary or another nominee of such Depositary.
The specific terms of the depositary arrangement with respect to any
Certificates of a Class will be described in the related Prospectus Supplement.
It is anticipated that the following provisions will apply to all depositary
arrangements:
Upon the issuance of a Global Certificate, the Depositary for such Global
Certificate will credit, on its book-entry registration and transfer system,
the respective denominations of the Certificates represented by such Global
Certificate to the accounts of institutions that have accounts with such
Depositary ("participants"). Ownership of beneficial interests in a Global
Certificate will be limited to participants or persons that may hold interests
through participants. Ownership of beneficial interests in such Global
Certificate will be shown on, and the transfer of that ownership will be
effected only through, records maintained by the Depositary for such Global
Certificate or by participants or persons that hold through participants. The
laws of some states require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such limits and such laws may
impair the ability to transfer beneficial interests in a Global Certificate.
So long as the Depositary for a Global Certificate, or its nominee, is the
owner of such Global Certificate, such Depositary or such nominee, as the case
may be, will be considered the sole owner or holder of the Certificates
represented by such Global Certificate for all purposes under the Agreement
relating to such Certificates. Except as set forth below, owners of beneficial
interests in a Global Certificate will not be entitled to have Certificates of
the Series represented by such Global Certificate registered in their names,
will not receive or be entitled to receive physical delivery of Certificates of
such Series in definitive form and will not be considered the owners or holders
thereof under the Agreement governing such Certificates.
Distributions or payments on Certificates registered in the name of or held
by a Depositary or its nominee will be made to the Depositary or its nominee,
as the case may be, as the registered owner for the holder of the Global
Certificate representing such Certificates. In addition, all reports required
under the applicable Agreement to be made to Certificateholders (as described
below under "Reports to Certificateholders") will be delivered to the
Depositary or its nominee, as the case may be. None of the Company, Servicer,
Trustee, or any agent thereof (including any applicable Certificate Registrar
or Paying Agent), will have any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests
14
<PAGE>
in a Global Certificate or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests or for providing
reports to the related beneficial owners.
The Company expects that the Depositary for Certificates of a Class, upon
receipt of any distribution or payment in respect of a Global Certificate, will
credit immediately participants' accounts with payments in amounts
proportionate to their respective beneficial interest in such Global
Certificate as shown on the records of such Depositary. The Company also
expects that payments by participants to owners of beneficial interests in such
Global Certificate held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in "street name," and will be the
responsibility of such participants.
If a Depositary for Certificates of a Class is at any time unwilling or
unable to continue as Depositary and a successor depositary is not appointed by
or on behalf of the Company within the time period specified in the Agreement,
the Company will cause to be issued Certificates of such Class in definitive
form in exchange for the related Global Certificate or Certificates. In
addition, the Company may at any time and in its sole discretion determine not
to have any Certificates of a Class represented by one or more Global
Certificates and, in such event, will cause to be issued Certificates of such
Class in definitive form in exchange for the related Global Certificate or
Certificates. Further, if the Company so specifies with respect to the
Certificates of a Class, an owner of a beneficial interest in a Global
Certificate representing Certificates of such Class may, on terms acceptable to
the Company and the Depositary for such Global Certificate, receive
Certificates of such Class in definitive form. In any such instance, an owner
of a beneficial interest in a Global Certificate will be entitled to physical
delivery in definitive form of Certificates of the Class represented by such
Global Certificate equal in denominations to such beneficial interest and to
have such Certificates registered in its name.
Conveyance of Loans
The Company will transfer, assign, set over and otherwise convey to the
Trustee all right, title and interest of the Company in the Loans, including
all principal and interest received on or with respect to the Loans (other than
receipts of principal and interest due on the Loans before the Cut-off Date).
On behalf of the Trust Fund, as the issuer of the related Series of
Certificates, the Trustee, concurrently with such conveyance, will execute and
deliver the Certificates to the order of the Company. The Loans will be as
described on a list attached to the Agreement. Such list will include the
amount of monthly payments due on each Loan as of the date of issuance of the
Certificates, the Loan Rate on each Loan and the maturity date of each Loan.
Such list will be available for inspection by any Certificateholder at the
principal executive office of the Servicer. Prior to the conveyance of the
Loans to the Trust Fund, the Company's internal audit department will complete
a review of all of the Loan files confirming the accuracy of the list of Loans
delivered to the Trustee. Any Loan discovered not to agree with such list in a
manner that is materially adverse to the interests of the Certificateholders
will be repurchased or substituted for by the Company, or, if the discrepancy
relates to the unpaid principal balance of a Loan, the Company may deposit cash
in the separate account maintained at an Eligible Institution in the name of
the Trustee (the "Certificate Account") in an amount sufficient to offset such
discrepancy. If the Trust Fund includes a Pre-Funding Account, the related
Prospectus Supplement will specify the conditions that must be satisfied prior
to any transfer of Subsequent Loans, including the requisite characteristics of
the Subsequent Loans.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
or its custodian will maintain possession of the Loans and any other documents
contained in the Loan files. Uniform Commercial Code financing statements will
be filed in Minnesota reflecting the sale and assignment of the Loans to the
Trustee, and the Company's accounting records and computer systems will also
reflect such sale and assignment.
The counsel to the Company identified in the applicable Prospectus Supplement
will render an opinion to the Trustee that the transfer of the Loans from the
Company to the related Trust Fund would, in the event the Company became a
debtor under the United States Bankruptcy Code, be treated as a true sale and
not as a
15
<PAGE>
pledge to secure borrowings. If, however, the transfer of the Loans from the
Company to the Trust Fund were treated as a pledge to secure borrowings by the
Company, the distribution of proceeds of the Loans to the Trust Fund might be
subject to the automatic stay provisions of the United States Bankruptcy Code,
which would delay the distribution of such proceeds for an uncertain period of
time. In addition, a bankruptcy trustee would have the power to sell the Loans
if the proceeds of such sale could satisfy the amount of the debt deemed owed
by the Company, or the bankruptcy trustee could substitute other collateral in
lieu of the Loans to secure such debt, or such debt could be subject to
adjustment by the bankruptcy trustee if the Company were to file for
reorganization under Chapter 11 of the United States Bankruptcy Code.
Except as otherwise specified in the related Prospectus Supplement, the
Company will make certain representations and warranties in the Agreement with
respect to each Loan as of the related Closing Date, including that: (a) as of
the Cut-off Date the most recent scheduled payment was made or was not
delinquent more than 59 days; (b) no provision of a Loan has been waived,
altered or modified in any respect, except by instruments or documents included
in the Loan file and reflected on the list of Loans delivered to the Trustee;
(c) each Loan is a legal, valid and binding obligation of the Obligor and is
enforceable in accordance with its terms (except as may be limited by laws
affecting creditors rights generally); (d) no Loan is subject to any right of
rescission, set-off, counterclaim or defense; (e) each Loan was originated by a
home equity lender in the ordinary course of such lender's business and
assigned to the Company or was originated by the Company directly; (f) no Loan
was originated in or is subject to the laws of any jurisdiction whose laws
would make the transfer of the Loan or an interest therein pursuant to the
Agreement or the Certificates unlawful; (g) each Loan complies with all
requirements of law; (h) no Loan has been satisfied, subordinated to a lower
lien ranking than its original position (if any) or rescinded; (i) each Loan
creates a valid and perfected lien on the related improved real estate; (j) all
parties to each Loan had full legal capacity to execute such Loan; (k) no Loan
has been sold, conveyed and assigned or pledged to any other person and the
Company has good and marketable title to each Loan free and clear of any
encumbrance, equity, loan, pledge, charge, claim or security interest, and is
the sole owner and has full right to transfer such Loan to the Trustee; (l) as
of the Cut-off Date there was no default, breach, violation or event permitting
acceleration under any Loan (except for payment delinquencies permitted by
clause (a) above), no event that with notice and the expiration of any grace or
cure period would constitute a default, breach, violation or event permitting
acceleration under such Loan, and the Company has not waived any of the
foregoing; (m) each Loan is a fully-amortizing loan with a fixed rate of
interest and provides for level payments over the term of such Loan; (n) each
Loan contains customary and enforceable provisions such as to render the rights
and remedies of the holder thereof adequate for realization against the
collateral; (o) the description of each Loan set forth in the list delivered to
the Trustee is true and correct; (p) there is only one original of each Loan;
and (q) each Loan was originated or purchased in accordance with the Company's
then-current underwriting guidelines.
Under the terms of the Agreement, if the Company becomes aware of a breach of
any such representation or warranty that materially adversely affects the Trust
Fund's interest in any Loan or receives written notice of such a breach from
the Trustee or the Servicer, then the Company will be obligated either to cure
such breach or to repurchase or, if so provided in the related Prospectus
Supplement, substitute for the affected Loan, in each case under the conditions
further described herein and in the Prospectus Supplement. This repurchase
obligation will constitute the sole remedy available to the Trust Fund and the
Certificateholders for a breach of a representation or warranty under the
Agreement with respect to the Loans (but not with respect to any other breach
by the Company of its obligations under the Agreement). If a prohibited
transaction tax under the REMIC provisions of the Code is incurred in
connection with such repurchase, distributions otherwise payable to Residual
Certificateholders will be applied to pay such tax. The Company will be
required to pay the amount of such tax that is not funded out of such
distributions.
The "Repurchase Price" of a Loan at any time means the outstanding principal
amount of such Loan (without giving effect to any Advances made by the Servicer
or the Trustee), plus interest at the applicable Pass-Through Rate on such Loan
from the end of the Due Period with respect to which the Obligor last made a
16
<PAGE>
payment (without giving effect to any Advances made by the Servicer or the
Trustee) through the end of the immediately preceding Due Period.
Payments on Loans
Each Certificate Account will be a trust account established by the Servicer
as to each Series of Certificates in the name of the Trustee (i) with a
depository institution, the long-term unsecured debt obligations of which at
the time of any deposit therein are rated within the two highest rating
categories, or such other rating category as will not adversely affect the
ratings assigned to the Certificates, by each rating agency rating the
Certificates of such Series, (ii) with the trust department of a national
bank, (iii) in an account or accounts the deposits in which are fully insured
by the FDIC, (iv) in an account or accounts the deposits in which are insured
by the FDIC (to the limits established by the FDIC), the uninsured deposits in
which are otherwise secured such that, as evidenced by an opinion of counsel,
the Certificateholders have a claim with respect to the funds in the
Certificate Account or a perfected first priority security interest against
any collateral securing such funds that is superior to the claims of any other
depositors or general creditors of the depository institution with which the
Certificate Account is maintained or (v) otherwise acceptable to the rating
agency without reduction or withdrawal of the rating assigned to the relevant
Certificates. The collateral eligible to secure amounts in the Certificate
Account is limited to United States government securities and certain other
high-quality investments specified in the applicable Agreement ("Eligible
Investments"). A Certificate Account may be maintained as an interest-bearing
account, or the funds held therein may be invested pending each succeeding
Payment Date in Eligible Investments.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will deposit in the Certificate Account on a daily basis all proceeds
and collections received or made by it with respect to the related Loans
subsequent to the Cut-off Date (including scheduled payments of principal and
interest due after the Cut-off Date but received by the Servicer on or before
the Cut-off Date), including:
(i) all Obligor payments on account of principal, including principal
prepayments, on the Loans;
(ii) all Obligor payments on account of interest on the Loans;
(iii) all amounts received and retained in connection with the
liquidation of defaulted Loans, net of liquidation expenses ("Net
Liquidation Proceeds");
(iv) any Advances made as described under "Advances" below and certain
other amounts required under the Agreement to be deposited in the
Certificate Account;
(v) all amounts received from any credit enhancement provided with
respect to a Series of Certificates; and
(vi) all proceeds of any Loan or property acquired in respect thereof
repurchased by the Servicer or the Company, as described under "Conveyance
of Loans" above or under "Repurchase Option" below.
Distributions on Certificates
Except as otherwise provided in the related Prospectus Supplement, on each
Payment Date for a Series of Certificates, the Trustee will withdraw from the
applicable Certificate Account and distribute to the Certificateholders of
such Series of record on the preceding Record Date an amount equal to, in the
aggregate, the "Amount Available" for such Payment Date. Unless otherwise
specified in the applicable Prospectus Supplement, the "Amount Available" for
a Payment Date is an amount equal to the aggregate of all amounts on deposit
in the Certificate Account as of the seventh Business Day following the end of
the related Due Period, or such other date as may be specified in the related
Prospectus Supplement (the "Determination Date") except: (i) all payments on
the Loans that were due on or before the Cut-off Date; (ii) all payments or
collections received after the Due Period preceding the month in which the
Payment Date occurs; (iii) all scheduled payments of principal and interest
due on a date or dates subsequent to the Due Period preceding the
Determination Date; (iv) amounts representing reimbursement for Advances, such
reimbursement being limited,
17
<PAGE>
if so specified in the related Prospectus Supplement, to amounts received on
particular Loans as late collections of principal or interest as to which the
Servicer has made an unreimbursed Advance; and (v) amounts representing
reimbursement for any unpaid Servicing Fee. In the case of a Series of
Certificates which includes only one Class, the Amount Available for each
Payment Date will be distributed pro rata to the holders of such Certificates.
In the case of any other Series of Certificates, the Amount Available for each
Payment Date will be allocated and distributed to holders of the Certificates
of such Series pursuant to the method and in the order of priority specified
in the applicable Prospectus Supplement. The amount of principal and interest
specified in the related Prospectus Supplement to be distributed to
Certificateholders is referred to herein as the "Certificate Distribution
Amount."
Within the time specified in the Agreement and described in the related
Prospectus Supplement, the Servicer will furnish a statement to the Trustee
setting forth the amount to be distributed on the related Payment Date on
account of principal and interest, stated separately, and a statement setting
forth certain information with respect to the Loans.
Advances
Unless otherwise specified in the related Prospectus Supplement, to the
extent that collections on a Loan in any Due Period are less than the
scheduled payment due thereon, the Servicer will be obligated to make an
advance of the uncollected portion of such scheduled payment. The Servicer
will be obligated to advance a delinquent payment on a Loan only to the extent
that the Servicer, in its sole discretion, expects to recoup such Advance from
subsequent collections on the Loan or from liquidation proceeds thereof. The
Servicer will deposit any Advances in the Certificate Account no later than
one Business Day before the following Payment Date. The Servicer will be
entitled to recoup its advances on a Loan from subsequent payments by or on
behalf of the Obligor and from liquidation proceeds (including foreclosure
resale proceeds), if any, of the Loan, and will release its right to
reimbursements in conjunction with the purchase of the Loan by the Company for
breach of representations and warranties. If the Servicer determines in good
faith that an amount previously advanced will not ultimately be recoverable
from payments by or on behalf of the Obligor or from liquidation proceeds
(including foreclosure resale proceeds), if any, of the Loan (an
"Uncollectible Advance"), the Servicer will be entitled to reimbursement from
payments on other Loans or from other funds available therefor.
Unless otherwise specified in the related Prospectus Supplement, if the
Servicer fails to make an Advance required under the Agreement, the Trustee
will be obligated to deposit the amount of such Advance in the Certificate
Account on the Payment Date. The Trustee will not, however, be obligated to
deposit any such amount if (i) the Trustee does not expect to recoup such
Advance from subsequent collections on the Loan or from liquidation proceeds
thereof, if any, or (ii) the Trustee determines that it is not legally able to
make such Advance.
Example of Distributions
The following is an example of the flow of funds as it would relate to a
hypothetical Series of Certificates issued, and with a Cut-off Date occurring,
in March 1996 (all weekdays are assumed to be business days):
<TABLE>
<S> <C> <C>
March 1......................................... (1) Cut-off Date.
March 1-31...................................... (2) Due Period. Servicer
receives scheduled payments
on the Loans and any
principal prepayments made
by Obligors and applicable
interest thereon.
March 29........................................ (3) Record Date.
April 9......................................... (4) Determination Date.
Distribution amount
determined.
April 15........................................ (5) Payment Date.
</TABLE>
18
<PAGE>
Succeeding months follow the pattern of (2) through (5). The flow of funds
with respect to any Series of Certificates may differ from the above example,
as specified in the related Prospectus Supplement.
- --------
(1) The initial principal balance of the Loan Pool will be the aggregate
principal balance of the Loans at the close of business on the Cut-off
Date, after deducting principal payments due on or before such date, which,
together with corresponding interest payments, are not part of the Loan
Pool and will not be passed through to Certificateholders.
(2) Scheduled payments and principal prepayments may be received at any time
during this period and will be deposited in the Certificate Account by the
Servicer for distribution to Certificateholders. When a Loan is prepaid in
full, interest on the amount prepaid is collected from the Obligor only to
the date of payment.
(3) Distributions on April 15 will be made to Certificateholders of record at
the close of business on the last Business Day of March, being the month
immediately preceding the month of distribution.
(4) On April 9 (the seventh Business Day following the end of the prior Due
Period), the Servicer will determine the amounts of principal and interest
which will be passed through on April 15. In addition, the Servicer may
advance funds to cover any delinquencies, in which event the distribution
to Certificateholders on April 15 will include the full amounts of
principal and interest due during March. The Servicer will also calculate
any changes in the relative interests evidenced by the Senior Certificates
and the Subordinated Certificates in the Trust Fund.
(5) On April 15, the amounts determined on April 9 will be distributed to
Certificateholders.
Indemnification
The Agreement requires the Company to defend and indemnify the Trust Fund,
the Trustee (including any agent of the Trustee) and the Certificateholders
(which indemnification will survive any removal of the Servicer as servicer of
the Loans) against any and all costs, expenses, losses, damages, claims and
liabilities, including reasonable fees and expenses of counsel and expenses of
litigation (a) arising out of or resulting from the use or ownership by the
Company or the Servicer or any affiliate thereof of any real estate related to
a Loan and (b) for any taxes which may at any time be asserted with respect to,
and as of the date of, the conveyance of the Loans to the Trust Fund (but not
including any federal, state or other tax arising out of the creation of the
Trust Fund and the issuance of the Certificates).
The Agreement also requires the Servicer, in connection with its duties as
servicer of the Loans, to defend and indemnify the Trust Fund, the Trustee and
the Certificateholders (which indemnification will survive any removal of the
Servicer as servicer of the Loans) against any and all costs, expenses, losses,
damages, claims and liabilities, including reasonable fees and expenses of
counsel and expenses of litigation, in respect of any action taken by the
Servicer with respect to any Loan while it was the Servicer.
Servicing
Pursuant to the Agreement, the Servicer will service and administer the Loans
assigned to the Trustee as more fully set forth below. The Servicer will
perform diligently all services and duties specified in each Agreement, in the
same manner as prudent lending institutions of mortgage loans of the same type
as the Loans in those jurisdictions where the related real properties are
located or as otherwise specified in the Agreement. The duties to be performed
by the Servicer will include collection and remittance of principal and
interest payments, collection of insurance claims and, if necessary,
foreclosure of Loans.
The Servicer will make reasonable efforts to collect all payments called for
under the Loans and, consistent with the Agreement, will follow such collection
procedures with respect to the Loans as it follows with respect to mortgage
loans serviced by it that are comparable to the Loans.
Evidence as to Compliance. Unless otherwise specified in the related
Prospectus Supplement, each Agreement will require the Servicer to deliver to
the Trustee a monthly report prior to each Payment Date,
19
<PAGE>
setting forth certain information regarding the Loan Pool and the Certificates
of such Series as is specified in the related Prospectus Supplement. Each such
report to the Trustee will be accompanied by a statement from an appropriate
officer of the Servicer certifying the accuracy of such report and stating that
the Servicer has not defaulted in the performance of its obligations under the
Agreement. On or before May 1 of each year, the Servicer will deliver to the
Trustee a report of a nationally recognized accounting firm stating that such
firm has examined certain documents and records relating to the servicing of
home equity loans serviced by the Servicer under pooling and servicing
agreements similar to the Agreement and stating that, on the basis of such
procedures, such servicing has been conducted in compliance with the Agreement,
except for any exceptions set forth in such report.
Certain Matters Regarding the Servicer. The Servicer may not resign from its
obligations and duties under an Agreement except upon a determination that its
duties thereunder are no longer permissible under applicable law. No such
resignation will become effective until the Trustee or a successor servicer has
assumed the Servicer's obligations and duties under such Agreement. The
Servicer can only be removed as servicer upon the occurrence of an Event of
Termination as discussed below.
The Servicer shall keep in force throughout the term of the Agreement (i) a
policy or policies of insurance covering errors and omissions for failure to
maintain insurance as required by the Agreement, and (ii) a fidelity bond. Such
policy or policies and such fidelity bond shall be in such form and amount as
is generally customary among persons which service a portfolio of home equity
loans having an aggregate principal amount of $10 million or more and which are
generally regarded as servicers acceptable to institutional investors.
Servicing Compensation and Payment of Expenses. For its servicing of the
Loans, the Servicer will receive servicing fees ("Servicing Fees") which
include a Monthly Servicing Fee (which the Company may assign) for each Due
Period (paid on the next succeeding Payment Date) equal to 1/12th of the
product of the annual servicing fee rate described in the applicable Prospectus
Supplement and the Pool Scheduled Principal Balance for such Payment Date. As
long as the Company is the Servicer, the Trustee will pay the Company its
Monthly Servicing Fee from any monies remaining after the Certificateholders
have received all payments of principal and interest for such Payment Date.
The Monthly Servicing Fee provides compensation for customary third-party
servicing activities to be performed by the Servicer for the Trust Fund, for
additional administrative services performed by the Servicer on behalf of the
Trust Fund and for expenses paid by the Servicer on behalf of the Trust Fund.
Customary servicing activities include collecting and recording payments,
communicating with Obligors, investigating payment delinquencies, providing
billing and tax records to Obligors and maintaining internal records with
respect to each Loan. Administrative services performed by the Servicer on
behalf of the Trust Fund include selecting and packaging the Loans, calculating
distributions to Certificateholders and providing related data processing and
reporting services for Certificateholders and on behalf of the Trustee.
Expenses incurred in connection with servicing of the Loans and paid by the
Company from its Monthly Servicing Fees include payment of fees and expenses of
accountants, payments of all fees and expenses incurred in connection with the
enforcement of Loans or foreclosure on collateral relating thereto, payment of
Trustee's fees, and payment of expenses incurred in connection with
distributions and reports to Certificateholders, except that the Servicer shall
be reimbursed out of the liquidation proceeds of a liquidated Loan for
customary out-of-pocket liquidation expenses incurred by it.
Events of Termination. Except as otherwise specified in the related
Prospectus Supplement, Events of Termination under each Agreement will occur if
(a) the Servicer fails to make any payment or deposit required under the
Agreement (including an Advance) and such failure continues for four business
days; (b) the Servicer fails to observe or perform in any material respect any
other covenant or agreement in the Agreement which continues unremedied for
thirty days; (c) the Servicer conveys, assigns or delegates its duties or
rights under the Agreement, except as specifically permitted under the
Agreement, or attempts to make such a conveyance, assignment or delegation; (d)
a court having jurisdiction in the premises enters a decree or order for relief
in
20
<PAGE>
respect of the Servicer in an involuntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or appoints a
receiver, liquidator, assignee, custodian, trustee, or sequestrator (or similar
official) of the Servicer, as the case may be, or enters a decree or order for
any substantial liquidation of its affairs; (e) the Servicer commences a
voluntary case under any applicable bankruptcy, insolvency or similar law, or
consents to the entry of an order for relief in an involuntary case under any
such law, or consents to the appointment of or taking possession by a receiver,
liquidator, assignee, trustee, custodian or its creditors, or fails to, or
admits in writing its inability to, pay its debts as they become due, or takes
any corporate action in furtherance of the foregoing; (f) the Servicer fails to
be an Eligible Servicer; or (g) if the Company is the Servicer, the Company's
servicing rights under its master seller-servicer contract with GNMA are
terminated. The Servicer will be required under the Agreement to give the
Trustee and the Certificateholders notice of an Event of Termination promptly
upon the occurrence of such event.
Rights Upon Event of Termination. Except as otherwise specified in the
related Prospectus Supplement, so long as an Event of Termination remains
unremedied, the Trustee may, and at the written direction of Certificateholders
representing 25% or more of the Aggregate Certificate Principal Balance of a
Series shall, terminate all of the rights and obligations of the Servicer under
the related Agreement and in and to the Loans, and the proceeds thereof,
whereupon (subject to applicable law regarding the Trustee's ability to make
advances) the Trustee or a successor Servicer under the Agreement will succeed
to all the responsibilities, duties and liabilities of the Servicer under the
Agreement and will be entitled to similar compensation arrangements; provided,
however, that neither the Trustee nor any successor Servicer will assume any
obligation of the Company to repurchase Loans for breaches of representations
or warranties, and the Trustee and such successor Servicer will not be liable
for any acts or omissions of the prior Servicer occurring prior to a transfer
of the Servicer's servicing and related functions or for any breach by such
Servicer of any of its obligations contained in the Agreement. Notwithstanding
such termination, the Servicer shall be entitled to payment of certain amounts
payable to it prior to such termination, for services rendered prior to such
termination. No such termination will affect in any manner the Company's
obligation to repurchase certain Loans for breaches of representations or
warranties under the Agreement. In the event that the Trustee would be
obligated to succeed the Servicer but is unwilling or unable so to act, it may
appoint, or petition to a court of competent jurisdiction for the appointment
of, a Servicer. Pending such appointment, the Trustee is obligated to act in
such capacity. The Trustee and such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
to the Servicer under the Agreement.
The Trustee will be under no obligation to take any action or to institute,
conduct or defend any litigation under the Agreement at the request, order or
direction of any of the Holders of Certificates, unless such Certificateholders
have offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which the Trustee may incur.
Reports to Certificateholders
The Trustee will forward to each Certificateholder on each Payment Date, or
as soon thereafter as is practicable, as specified in the related Prospectus
Supplement, a statement setting forth, among other things:
(a) the amount of such distribution which constitutes Monthly
Principal, specifying the amounts constituting scheduled payments by
Obligors, principal prepayments on the Loans, and other payments with
respect to the Loans;
(b) the amount of such distribution which constitutes Monthly
Interest;
(c) the remaining Principal Balance represented by such
Certificateholder's interest;
(d) the amount of fees payable out of the Trust Fund;
(e) the Pool Factor (a percentage derived from a fraction the
numerator of which is the remaining Principal Balance of the Certificates
and the denominator of which is the Initial Principal Amount of the
Certificates) immediately before and immediately after such Payment Date;
21
<PAGE>
(f) the number and aggregate principal balance of Loans delinquent (i)
31-59 days, (ii) 60-89 and (iii) 90 or more days;
(g) the number of Loans liquidated during the Due Period ending
immediately before such Payment Date;
(h) such customary factual information as is necessary to enable
Certificateholders to prepare their tax returns; and
(i) such other customary factual information available to the Servicer
without unreasonable expense as is necessary to enable Certificateholders
to comply with regulatory requirements.
Repurchase Option
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will provide that on any Payment Date on which the Pool Scheduled
Principal Balance is less than 10% of the Cut-Off Date Pool Principal Balance,
the Company or the Servicer will have the option to repurchase, on 30 days'
prior written notice to the Trustee, all outstanding Loans in the related Loan
Pool at a price equal to the greatest of (i) the principal balance of the Loans
on the prior Payment Date plus 30 days' accrued interest thereon at the
applicable Pass-Through Rate and any delinquent payments of interest thereon,
plus the fair market value (as determined by the Servicer) of any acquired
properties, (ii) the fair market value of all of the assets of the Trust Fund,
and (iii) an amount equal to the Aggregate Certificate Principal Balance of the
related Certificates plus interest on such Certificates payable on and prior to
the Payment Date occurring in the month following such repurchase (less amounts
on deposit in the Certificate Account and available to pay such principal and
interest). Such price will be paid on the Payment Date on which such purchase
occurs to the Certificateholders of record on the last Business Day of the
immediately preceding Due Period in immediately available funds against the
Trustee's delivery of the Loans and any acquired properties to the Servicer.
The distribution of such purchase price to Certificateholders will be in lieu
of any other distribution to be made on such Payment Date with respect to the
related Loans.
Amendment
Unless otherwise specified in the related Prospectus Supplement, the
Agreement may be amended by the Company, the Servicer and the Trustee without
the consent of the Certificateholders, (i) to cure any ambiguity, (ii) to
correct or supplement any provision therein that may be inconsistent with any
other provision therein, (iii) if an election has been made with respect to a
particular Series of Certificates to treat the Trust Fund as a real estate
mortgage investment conduit ("REMIC") within the meaning of Section 860D(a) of
the Code, to maintain the REMIC status of the Trust Fund and to avoid the
imposition of certain taxes on the REMIC or (iv) to make any other provisions
with respect to matters or questions arising under such Agreement that are not
inconsistent with the provisions thereof, provided that such action will not
adversely affect in any material respect the interests of the
Certificateholders of the related Series. Unless otherwise specified in the
related Prospectus Supplement, the Agreement may also be amended by the
Company, the Servicer and the Trustee with the consent of the
Certificateholders (other than holders of Residual Certificates) representing
66 2/3% or more of the Aggregate Certificate Principal Balance of a Series for
the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of such Agreement or of modifying in any
manner the rights of the Certificateholders; provided, however, that no such
amendment that reduces in any manner the amount of, or delays the timing of,
any payment received on or with respect to Loans which are required to be
distributed on any Certificate may be effective without the consent of the
Holders of each such Certificate.
Termination of the Agreement
The obligations created by each Agreement will terminate (after distribution
of all Monthly Principal and Monthly Interest then due to Certificateholders)
on the earlier of (a) the Payment Date next succeeding the later of the final
payment or other liquidation of the last Loan or the disposition of all
property acquired upon
22
<PAGE>
foreclosure of any Loan; or (b) the Payment Date on which the Company or the
Servicer repurchases the Loans as described under "Description of the
Certificates--Repurchase Option." However, the Company's representations,
warranties and indemnities will survive any termination of the Agreement.
The Trustee
The Prospectus Supplement for a Series of Certificates will specify the
Trustee under the related Agreement. The Trustee may have customary commercial
banking relationships with the Company or its affiliates and the Servicer or
its affiliates.
The Trustee may resign at any time, in which event the Company will be
obligated to appoint a successor Trustee. The Company may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement or if the Trustee becomes insolvent. Any resignation or removal of
the Trustee and appointment of a successor Trustee will not become effective
until acceptance of the appointment by the successor Trustee.
The Trustee will make no representation as to the validity or sufficiency of
the Agreement, the Certificates or any Loan, Loan file or related documents,
and will not be accountable for the use or application by the Company of any
funds paid to the Company, as seller, in consideration of the conveyance of the
Loans, or deposited into or withdrawn from the Certificate Account by the
Servicer. If no Event of Termination has occurred, the Trustee will be required
to perform only those duties specifically required of it under the Agreement.
However, upon receipt of the various certificates, reports or other instruments
required to be furnished to it, the Trustee will be required to examine them to
determine whether they conform as to form to the requirements of the Agreement.
Whether or not an Event of Termination has occurred, the Trustee is not
required to expend or risk its own funds or otherwise incur any financial
liability in the performance of its duties or the exercise of its powers if it
has reasonable grounds to believe that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
Under the Agreement, the Servicer agrees to pay to the Trustee on each
Payment Date (a) reasonable compensation for all services rendered by it
thereunder (which compensation shall not be limited by any provision of law in
regard to the compensation of a trustee of an express trust) and (b)
reimbursement for all reasonable expenses, disbursements and advances incurred
or made by the Trustee in accordance with any provision of the Agreement
(including reasonable compensation and the expenses and disbursements of its
agents and counsel), except any such expense, disbursement or advance as may be
attributable to the Trustee's negligence or bad faith. The Company has agreed
to indemnify the Trustee for, and to hold it harmless against, any loss,
liability or expense incurred without negligence or bad faith on its part,
arising out of or in connection with the acceptance or administration of the
Trust Fund and the Trustee's duties thereunder, including the costs and
expenses of defending itself against any claim or liability in connection with
the exercise or performance of any of the Trustee's powers or duties
thereunder.
CERTAIN LEGAL ASPECTS OF THE LOANS; REPURCHASE OBLIGATIONS
As a result of the Company's conveyance and assignment of a pool of Loans to
a Trust Fund, the Certificateholders of such Series, as the beneficial owners
of the Trust Fund, will succeed collectively to all of the rights thereunder
(including the right to receive payment on the Loans). The following discussion
contains summaries of certain legal aspects of home equity loans secured by
residential properties which are general in nature. Because such legal aspects
are governed by applicable state law (which laws may differ substantially), the
summaries do not purport to be complete nor to reflect the laws of any
particular state, nor to encompass the laws of all states in which the real
estate securing the Loans may be situated or which may govern any Loan. The
summaries are qualified in their entirety by reference to the applicable
federal and state laws governing the Loans.
23
<PAGE>
Mortgages and Deeds of Trust
The Loans will be secured by either mortgages, deeds of trust, security deeds
or deeds to secure debt depending upon the prevailing practice in the state in
which the underlying property is located, and may have first, second or third
priority. In some states, a mortgage creates a lien upon the real property
encumbered by the mortgage or deed of trust. In other states, the mortgage
conveys legal title to the property to the mortgagee subject to a condition
subsequent, i.e., the payment of the indebtedness secured thereby. There are
two parties to a mortgage: the mortgagor, who is the borrower, and the
mortgagee, who is the lender. In a mortgage state, the mortgagor delivers to
the mortgagee a note or retail installment contract evidencing the loan and the
mortgage. Although a deed of trust is similar to a mortgage, a deed of trust
has three parties: the borrower, or trustor, the lender as beneficiary, and a
third-party grantee called the trustee. Under a deed of trust, the borrower
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure repayment of the loan. The
trustee's authority under a deed of trust and the mortgagee's authority under a
mortgage are governed by applicable state law, the express provisions of the
deed of trust or mortgage, and, in some cases with respect to deeds of trust,
the directions of the beneficiary. Some states use a security deed or deed to
secure debt which is similar to a deed of trust except that it has only two
parties: a grantor (similar to a mortgagor) and a grantee (similar to a
mortgagee). Mortgages, deeds of trust and deeds to secure debt are not prior to
liens for real estate taxes and assessments and other charges imposed under
governmental police powers. Priority between mortgages, deeds of trust and
deeds to secure debt and other encumbrances depends on their terms, the
knowledge of the parties to such instrument in some cases and generally on the
order of recordation of the mortgage, deed of trust or the deed to secure debt
in the appropriate recording office.
Subordinate Mortgages; Rights of Senior Mortgagees or Beneficiaries
A substantial number of the mortgages, security deeds, deeds to secure debt
and deeds of trust securing the Loans in any Loan Pool are expected to be
second or third mortgages or deeds of trust which are junior to mortgages or
deeds of trust held by other lenders or institutional investors. The rights of
the related Trust Fund (and therefore the Certificateholders), as beneficiary
under a junior deed of trust or as mortgagee under a junior mortgage, are
subordinate to those of the mortgagee or beneficiary under the senior mortgage
or deed of trust, including the prior rights of the senior mortgagee or
beneficiary to receive hazard insurance and condemnation proceeds and to cause
the property securing the Loan to be sold upon default of the mortgagor or
trustor under the senior mortgage or deed of trust, thereby extinguishing the
junior mortgagee's or junior beneficiary's lien unless the Servicer on behalf
of the Trust Fund asserts its subordinate interest in the property in
foreclosure litigation and, possibly, satisfies the defaulted senior loan or
loans. As discussed more fully below, a junior mortgagee or beneficiary may
satisfy a defaulted senior loan in full, or in some states may cure such
default and bring the senior loan current, in either event usually adding the
amounts expended to the balance due on the junior loan. Although the Company
generally does not cure defaults under a senior mortgage or deed of trust, it
is the Company's standard practice to protect its interest by attending any
foreclosure sale and bidding for property only if it is in the Company's best
interests to do so.
The standard form of the mortgage or deed of trust used by most institutional
lenders, like that of the Company, confers on the mortgagee or beneficiary the
right both to receive all proceeds collected under any hazard insurance policy
and all awards made in connection with any condemnation proceedings, and to
apply such proceeds and awards to any indebtedness secured by the mortgage or
deed of trust, in such order as the mortgagee or beneficiary may determine.
Thus, in the event improvements on the property are damaged or destroyed by
fire or other casualty, or in the event the property is taken by condemnation,
the mortgagee or beneficiary under the underlying first mortgage or deed of
trust will have the prior right to collect any insurance proceeds payable under
a hazard insurance policy and any award of damages in connection with the
condemnation and to apply the same to the indebtedness secured by the first
mortgage or deed of trust. Proceeds in excess of the amount of first mortgage
indebtedness, in most cases, may be applied to the indebtedness of a junior
mortgage or deed of trust.
24
<PAGE>
The form of mortgage or deed of trust used by institutional lenders may
contain a "future advance" clause, which provides, in essence, that additional
amounts advanced to or on behalf of the mortgagor or trustor by the mortgagee
or beneficiary are to be secured by the mortgage or deed of trust. The priority
of any advance made under the clause depends, in some states, on whether the
advance was an "obligatory" or "optional" advance. If the mortgagee or
beneficiary is obligated to advance the additional amounts, the advance is
entitled to receive the same priority as amounts initially advanced under the
mortgage or deed of trust, notwithstanding the fact that there may be junior
mortgages or deeds of trust and other liens which intervene between the date of
recording of the mortgage or deed of trust and the date of the future advance,
and, in some states, notwithstanding that the senior mortgagee or beneficiary
had actual knowledge of such intervening junior mortgages or deeds of trust and
other liens at the time of the advance. Where the mortgagee or beneficiary is
not obligated to advance additional amounts or, in some states, has actual
knowledge of the intervening junior mortgages or deeds of trust and other
liens, the advance will be subordinate to such intervening junior mortgages or
deeds of trust and other liens. Priority of advances under the clause rests, in
some states, on state statutes giving priority to all advances made under the
loan agreement to a "credit limit" amount stated in the recorded mortgage.
Another provision typically found in the form of the mortgage or deed of
trust used by most institutional lenders obligates the mortgagor or trustor to
pay before delinquency all taxes and assessments on the property and, when due,
all encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to
perform any of these obligations, the mortgagee or beneficiary is given the
right under the mortgage or deed of trust to perform the obligation itself, at
its election, with the mortgagor or trustor agreeing to reimburse the mortgagee
or beneficiary for any sums expended by the mortgagee or beneficiary on behalf
of the mortgagor or trustor. All sums so expended by a senior mortgagee or
beneficiary generally become part of the indebtedness secured by the senior
mortgage or deed of trust.
Subordinate Financing
Where the borrower encumbers the mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the borrower
may have difficulty servicing and repaying multiple loans. Second, acts of the
senior lender which prejudice the junior lender or impair the junior lender's
security may create a superior equity in favor of the junior lender. For
example, if the borrower and the senior lender agree to an increase in the
principal amount of or the interest rate payable on the senior loan, the senior
lender may lose its priority to the extent any existing junior lender is harmed
or the borrower is additionally burdened. Third, if the borrower defaults on
the senior loan and/or any junior loan or loans, the existence of junior loans
and actions taken by junior lenders can impair the security available to the
senior lender and can interfere with or delay the taking of action by the
senior lender. The bankruptcy of a junior lender may operate to stay
foreclosure or similar proceedings by the senior lender.
Foreclosure
Foreclosure is a legal procedure that allows the mortgagor to recover its
mortgage debt by enforcing its rights and available remedies under the
mortgage, deed of trust, deed to secure debt or security deed. Foreclosure of a
mortgage is generally accomplished by judicial action. A foreclosure action is
regulated by statutes and rules and subject throughout to the court's equitable
powers. Generally, a mortgagor is bound by the terms of the mortgage note and
the mortgage as made and cannot be relieved from its own default. However,
since a foreclosure action is equitable in nature and is addressed to a court
of equity, the court may relieve a mortgagor of a default and deny the
mortgagee foreclosure on proof that the mortgagor's default was neither willful
nor in bad faith and that the mortgagee's action was such as to establish a
waiver, or fraud, bad faith, oppressive or unconscionable conduct as to warrant
a court of equity to refuse affirmative relief to the
25
<PAGE>
mortgagee. Under certain circumstances a court of equity may relieve the
mortgagor from an entirely technical default where such default was not
willful. Generally, the action is initiated by the service of legal pleadings
upon all parties having an interest of record in the real property. Delays in
completion of the foreclosure occasionally may result from difficulties in
locating necessary parties defendant. When the mortgagee's right to foreclosure
is contested, the legal proceedings necessary to resolve the issue can be time-
consuming. After the completion of a judicial foreclosure proceeding, the court
may issue a judgment of foreclosure and appoint a referee or other officer to
conduct the sale of the property. In some states, mortgages may also be
foreclosed by advertisement, pursuant to a power of sale provided in the
mortgage. Foreclosure of a mortgage by advertisement is essentially similar to
foreclosure of a deed of trust by non-judicial power of sale.
Foreclosure of a deed of trust or a deed to secure debt is generally
accomplished by a non-judicial trustee's sale under a specific provision in the
deed of trust, security deed or deed to secure debt that authorizes the trustee
to sell the property upon any default by the borrower under the terms of the
note, deed of trust, security deed or deed to secure debt. In certain states,
such foreclosure also may be accomplished by judicial action in the manner
provided for foreclosure of mortgages. In some states, prior to a sale, the
trustee must record a notice of default and send a copy to the borrower trustor
and to any person who has recorded a request for a copy of a notice of default
and notice of sale. In addition, prior to such sale, the trustee must provide
notice in some states to any other individual having an interest of record in
the real property, including any junior lienholders. Certain states require
that a notice of sale be posted in a public place and, in most states,
published for a specified period of time in one or more newspapers in a
specified manner prior to the date of trustee's sale. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest of record in the property.
In some states, the borrower trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
the borrower, or any other person having a junior encumbrance on the real
estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred in enforcing the
obligation. Certain state laws control the amount of foreclosure expenses and
costs, including attorney's fees, which may be recovered by a lender.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer, or by the trustee, is
generally a public sale. However, because of the difficulty a potential third
party buyer at the sale might have in determining the exact status of title and
because the physical condition of the property may have deteriorated during the
foreclosure proceedings, it is not common for a third party to purchase the
property at the foreclosure sale. In some states, there is a statutory minimum
purchase price which the lender may offer for the property. Thereafter, subject
to the right of the borrower in some states to remain in possession during the
redemption period, the lender will assume the burdens of ownership, including
obtaining hazard insurance, paying taxes and making such repairs at its own
expense as are necessary to render the property suitable for sale. The lender
commonly will obtain the services of a real estate broker and pay the broker a
commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property. Any loss resulting from such sale may be
reduced by the receipt of mortgage insurance proceeds, if any.
A second or third mortgagee (junior mortgagee) may not foreclose on the
property securing a second or first mortgage (senior mortgages) unless it
forecloses subject to the senior mortgages, in which case it must either pay
the entire amount due on the senior mortgages prior to or at the time of the
foreclosure sale or make payments on the senior mortgages in the event the
mortgagor is in default thereunder, in either event adding the amounts expended
to the balance due on the junior loan, and may be subrogated to the rights of
the senior mortgagees. In addition, in the event that the foreclosure by a
junior mortgagee triggers the enforcement of a "due-on-sale" clause in a senior
mortgage, the junior mortgagee may be required to pay the full amount of the
senior mortgages to the senior mortgagees. Accordingly, with respect to those
Loans which are second or third mortgage loans, if the lender purchases the
property, the lender's title will be subject to all senior liens and claims and
certain governmental liens.
26
<PAGE>
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees, and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of
junior mortgages or deeds of trust and other liens and claims in order of their
priority, whether or not the borrower is in default. Any additional proceeds
are generally payable to the mortgagor or trustor. The payment of the proceeds
to the holders of junior mortgages may occur in the foreclosure action of the
senior mortgagee or may require the institution of separate legal proceeding.
Some states impose prohibitions or limitations on remedies available to the
mortgagee, including the right to recover the debt from the mortgagor. See "--
Anti-Deficiency Legislation and Other Limitations on Lenders" herein.
In certain jurisdictions, real property transfer or recording taxes or fees
may be imposed on the related Trust Fund with respect to its acquisition (by
foreclosure or otherwise) and disposition of real property securing a Loan, and
any such taxes or fees imposed may reduce liquidation proceeds with respect to
such property, as well as distributions payable to the Certificateholders.
Second or Third Mortgages
The Loans may be secured by second or third mortgages or deeds of trust,
which are junior to first or second mortgages or deeds of trust held by other
lenders. The rights of the Certificateholders as the holders of a junior deed
of trust, junior mortgage, or junior security deed are subordinate in lien and
in payment to those of the holder of the senior mortgage, deed of trust, or
security deed including the prior rights of the senior mortgagee or beneficiary
to receive and apply hazard insurance and condemnation proceeds and, upon
default of the mortgagor under the senior mortgage or deed of trust, to cause a
foreclosure on the property. Upon completion of the foreclosure proceedings by
the holder of the senior mortgage or the sale pursuant to the senior deed of
trust, the junior mortgagee's or junior beneficiary's lien will be extinguished
unless the junior lienholder satisfies the defaulted senior loan or asserts its
subordinate interest in a property in foreclosure proceedings. Such
extinguishment will eliminate access to the collateral for the Loan. See "--
Foreclosure" herein.
Furthermore, the terms of the junior mortgage, deed of trust, deed to secure
debt or security deed are subordinate to the terms of the senior mortgage, deed
of trust, deed to secure debt or security deed. In the event of a conflict
between the terms of the senior mortgage, deed of trust, deed to secure debt or
security deed and the junior mortgage, deed of trust, deed to secure debt or
security deed, the terms of the senior mortgage, deed of trust, deed to secure
debt or security deed will govern generally. Upon a failure of the mortgagor or
trustor to perform any of its obligations, the senior mortgagee or beneficiary,
subject to the terms of the senior mortgage, deed of trust, deed to secure debt
or security deed may have the right to perform the obligation itself.
Generally, all sums so expended by the mortgagee or beneficiary become part of
the indebtedness secured by the mortgage, deed of trust, deed to secure debt or
security deed. To the extent a first mortgagee expends such sums, such sums
will generally have priority over all sums due under a junior mortgage, deed of
trust, deed to secure debt or security deed.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an
interest in the property which is subordinate to the foreclosing mortgagee,
from their "equity of redemption." The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such
27
<PAGE>
action. Those having an equity of redemption must generally be made parties and
duly summoned to the foreclosure action in order for their equity of redemption
to be barred.
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
certain other states, this right of redemption applies only to sale following
judicial foreclosure, and not to sale pursuant to a non-judicial power of sale.
In most states where the right of redemption is available, statutory redemption
may occur upon payment of the foreclosure purchase price, accrued interest and
expenses of foreclosure. In other states, redemption may be authorized if the
former borrower pays only a portion of the sums due. In some states, the right
to redeem is an equitable right. The equity of redemption, which is a non-
statutory right that must be exercised prior to foreclosure sale, should be
distinguished from statutory rights of redemption. The effect of a right of
redemption is to diminish the ability of the lender to sell the foreclosed
property. The exercise of a right of redemption would defeat the title of any
purchaser at a foreclosure sale, or of any purchaser from the lender subsequent
to judicial foreclosure or sale under a deed of trust. Consequently, the
practical effect of the redemption right is to force the lender to maintain the
property and pay the expenses of ownership until the redemption period has run.
In some states, there is no right to redeem property after a trustee's sale
under a deed of trust.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory restrictions that limit the remedies of
a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the
borrower equal in most cases to the difference between the amount due to the
lender and the net amount realized upon the public sale.
Some state statutes may require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of these states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, when applicable, is that
lenders will usually proceed first against the security rather than bringing a
personal action against the borrower.
Other statutory provisions may limit any deficiency judgment against the
borrower following a foreclosure sale to the excess of the outstanding debt
over the fair market value of the property at the time of such sale. The
purpose of these statutes is to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result
of low or no bids at the foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are provided for
in certain instances where the value of the lender's security has been impaired
by acts or omissions of the borrower, for example, in the event of waste of the
property.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to realize upon its security and/or enforce a
deficiency judgment. For example, in a Chapter 13 proceeding, the holder may
not be able to obtain a lift of the automatic stay to foreclose if the borrower
has equity and the home is necessary to the bankruptcy reorganization.
Generally, with respect to the federal bankruptcy law, the filing of a petition
acts as a stay against virtually all actions against the debtor, including the
enforcement of remedies of collection of a debt and, often, no interest or
principal payments are made during bankruptcy proceedings. A bankruptcy court
may also grant the debtor a reasonable time to cure a payment default with
respect to a
28
<PAGE>
mortgage loan on a debtor's residence by paying arrearages and reinstate the
original mortgage loan payment schedule even though the lender accelerated the
mortgage loan and final judgment of foreclosure had been entered in state court
(provided no sale of the property had yet occurred) prior to the filing of the
debtor's Chapter 13 petition. Some courts with federal bankruptcy jurisdiction
have approved plans, based on the particular facts of the reorganization case,
that effected the curing of a mortgage loan default by paying arrearages over a
number of years. In the case of a mortgage loan not secured by the debtor's
principal residence, courts with federal bankruptcy jurisdiction may also
reduce the monthly payments due under such mortgage loan, change the rate of
interest and alter the mortgage loan repayment schedule.
The Code provides priority to certain federal tax liens over the lien of the
mortgage or deed of trust. The Bankruptcy Code also provides priority to
certain tax liens over the lien of the mortgage or deed of trust. The laws of
some states provide priority to certain state tax liens over the lien of the
mortgage or deed of trust. Numerous federal and some state consumer protection
laws impose substantive requirements upon mortgage lenders in connection with
the origination, servicing and the enforcement of mortgage loans. These laws
include the federal Truth in Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act, state licensing requirements, and related statutes and
regulations. These federal laws and state laws impose specific statutory
liabilities upon lenders who originate or service mortgage loans and who fail
to comply with the provisions of the law. In some cases, this liability may
affect assignees of the mortgage loans.
Consumer Protection Laws with respect to Loans
Numerous Federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include
the Federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity
Act, Regulation "B", the Fair Credit Reporting Act, and related statutes. The
Home Ownership and Equity Protection Act of 1994 (the "Home Protection Act"),
which became effective on October 1, 1995, adds provisions to Regulation Z
which impose additional disclosure and other requirements on creditors involved
in non-purchase money mortgage loans with high interest rates or high up-front
fees and charges. It is possible that some Loans included in a Loan Pool may be
subject to such provisions. The Home Protection Act applies to mortgage loans
originated on or after the effective date of such regulations. These laws can
impose specific statutory liabilities upon creditors who fail to comply with
their provisions and may affect the enforceability of the contract.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided secured
parties under the UCC and related laws violate the due process protections
provided under the 14th Amendment to the Constitution of the United States. For
the most part, courts have upheld the notice provisions of the UCC and related
laws as reasonable or have found that the repossession and resale by the
creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission is
intended to defeat the ability of the transferor of a consumer credit contract
which is the seller of goods which gave rise to the transaction (and certain
related lenders and assignees) to transfer such contract free of notice of
claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the debtor could
assert against the seller of goods, such as a home improvement contractor.
Liability under this rule is limited to amounts paid under a Loan; however, the
Obligor also may be able to assert the rule to set off remaining amounts due as
a defense against a claim brought by the Trust Fund against such Obligor. The
Home Protection Act provides that assignees of certain high-interest, non-
purchase money mortgage loans (which may include some Loans) are subject to all
claims and defenses that the debtor could assert against the original creditor,
unless the assignee demonstrates that a reasonable person in the exercise of
29
<PAGE>
ordinary due diligence could not have determined that the mortgage loan was
subject to the provisions of the Home Protection Act.
Enforceability of Certain Provisions
The standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made. In certain states there are or may be specific limitations upon
late charges which a lender may collect from a borrower for delinquent
payments. Under the Agreement, late charges (to the extent permitted by law and
not waived by the Company) will be retained by the Company as additional
servicing compensation.
The standard forms of note, mortgage and deed of trust also include a debt-
acceleration clause, which permits the lender to accelerate the debt upon a
monetary default of the borrower, after the applicable cure period. Courts will
generally enforce clauses providing for acceleration in the event of a material
payment default. However, courts, exercising equity jurisdiction, may refuse to
allow a lender to foreclose a mortgage or deed of trust when an acceleration of
the indebtedness would be inequitable or unjust and the circumstances would
render the acceleration unconscionable.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial
remedies that may be fashioned include judicial requirements that the lender
undertake affirmative actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the
loan. In some cases, courts have required lenders to reinstate loans or recast
payment schedules to accommodate borrowers who are suffering from temporary
financial disability. In some cases, courts have limited the right of lenders
to foreclose if the default under the mortgage instrument is not monetary, such
as the borrower failing to adequately maintain the property or the borrower
executing a junior mortgage or deed of trust affecting the property. In other
cases, some courts have been faced with the issue whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under mortgages or the deeds of trust receive notices in
addition to statutorily-prescribed minimum requirements. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust or under a mortgage having a
power of sale does not involve sufficient state action to afford constitutional
protection to the borrower.
"Due-on-Sale" Clauses
All of the Loan documents will contain due-on-sale clauses unless the
Prospectus Supplement indicates otherwise. These clauses permit the Servicer to
accelerate the maturity of the loan on notice, which is usually 30 days, if the
borrower sells, transfers or conveys the property without the prior consent of
the mortgagee. In recent years, court decisions and legislative actions placed
substantial restrictions on the right of lenders to enforce such clauses in
many states. However, effective October 15, 1982, Congress enacted the Garn-St
Germain Depository Institutions Act of 1982 (the "Garn-St. Germain Act"),
which, after a three-year grace period, preempts state laws which prohibit the
enforcement of due-on-sale clauses by providing, among other matters, that
"due-on-sale" clauses in certain loans (including the Loans) made after the
effective date of the Garn-St. Germain Act are enforceable within certain
limitations as set forth in the Garn-St. Germain Act and the regulations
promulgated thereunder.
By virtue of the Garn-St. Germain Act, the Servicer generally may be
permitted to accelerate any Loan which contains a "due-on-sale" clause upon
transfer of an interest in the mortgaged property. This ability to accelerate
will not apply to certain types of transfers, including (i) the granting of a
leasehold interest which has a term of three years or less and which does not
contain an option to purchase, (ii) a transfer to a relative resulting from the
death of a mortgagor or trustor, or a transfer where the spouse or child(ren)
becomes an owner of the mortgaged property in each case where the transferee(s)
will occupy the mortgaged property, (iii) a transfer resulting from a decree of
dissolution of marriage, legal separation agreement or from an incidental
30
<PAGE>
property settlement agreement by which the spouse becomes an owner of the
mortgaged property, (iv) the creation of a lien or other encumbrance
subordinate to the lender's security instrument which does not relate to a
transfer of rights of occupancy in the mortgaged property (provided that such
lien or encumbrance is not created pursuant to a contract for deed), (v) a
transfer by devise, descent or operation of law on the death of a joint tenant
or tenant by the entirety, and (vi) other transfers as set forth in the Garn-
St. Germain Act and the regulations thereunder. As a result, a lesser number of
Loans which contain "due-on-sale" clauses may extend to full maturity than
earlier experience would indicate with respect to single-family mortgage loans.
The extent of the effect of the Garn-St. Germain Act on the average lives and
delinquency rates of the Loans, however, cannot be predicted.
The inability to enforce a due-on-sale clause may result in Loans bearing an
interest rate below the current market rate being assumed by a new home buyer
rather than being paid off, which may have an impact upon the average life of
the Loans and the number of Loans which may be outstanding until maturity.
Environmental Legislation
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property may become
liable in certain circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the
definition of owners and operators those who, without participating in the
management of a facility, hold indicia of ownership primarily to protect a
security interest in the facility. What constitutes sufficient participation in
the management of a property securing a loan or the business of a borrower to
render the exemption unavailable to a lender has been a matter of
interpretation by the courts. CERCLA has been interpreted to impose liability
on a secured party, even absent foreclosure, where the party participated in
the financial management of the borrower's business to a degree indicating a
capacity to influence waste disposal decisions. However, court interpretations
of the secured creditor exemption have been inconsistent. In addition, when
lenders foreclose and thereupon become owners of collateral property, courts
are inconsistent as to whether such ownership renders the secured creditor
exemption unavailable. Other federal and state laws in certain circumstances
may impose liability on a secured party which takes a deed-in-lieu of
foreclosure, purchases a mortgaged property at a foreclosure sale, or operates
a mortgaged property on which contaminants other than CERCLA hazardous
substances are present, including petroleum, agricultural chemicals, hazardous
wastes, asbestos, radon, and lead-based paint. Such cleanup costs may be
substantial. It is possible that such cleanup costs could become a liability of
a Trust Fund and reduce the amounts otherwise distributable to the holders of
the related Series of Certificates in certain circumstances if such cleanup
costs were incurred. Moreover, certain states by statute impose a lien for any
cleanup costs incurred by such state on the property that is the subject of
such cleanup costs (an "environmental lien"). All subsequent liens on such
property generally are subordinated to such an environmental lien and, in some
states, even prior recorded liens are subordinated to environmental liens. In
the latter states, the security interest of the Trustee in a related parcel of
real property that is subject to such an environmental lien could be adversely
affected.
Traditionally, many residential mortgage lenders have not taken steps to
evaluate whether contaminants are present with respect to any mortgaged
property prior to the origination of the mortgage loan or prior to foreclosure
or accepting a deed-in-lieu of foreclosure. Accordingly, the Company has not
made and will not make such evaluations prior to the origination of the Loans.
Neither the Company nor any replacement Servicer will be required by any
Agreement to undertake any such evaluations prior to foreclosure or accepting a
deed-in-lieu of foreclosure. The Company does not make any representations or
warranties or assume any liability with respect to the absence or effect of
contaminants on any related real property or any casualty resulting from
31
<PAGE>
the presence or effect of contaminants. However, the Company will not foreclose
on related real property or accept a deed-in-lieu of foreclosure if it knows or
reasonably believes that there are material contaminated conditions on such
property. A failure so to foreclose may reduce the amounts otherwise available
to Certificateholders of the related Series.
Soldiers' and Sailors' Civil Relief Act
Application of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), would adversely affect, for an indeterminate period
of time, the ability of the Servicer to collect full amounts of interest on
certain of the Loans. Any shortfall in interest collections resulting from the
application of the Relief Act or similar legislation, which would not be
recoverable from the related Loans, would result in a reduction of the amounts
distributable to the Certificateholders. In addition, the Relief Act imposes
limitations that would impair the ability of the Servicer to foreclose on an
affected mortgage, deed of trust, deed to secured debt or security deed during
the mortgagor's period of active duty status, and, under certain circumstances,
during an additional three month period thereafter. Thus, in the event that the
Relief Act or similar legislation applies to any Loan which goes into default,
there may be delays in payment on the Certificates in connection therewith. Any
other interest shortfalls, deferrals or forgiveness of payments on the Loans
resulting from similar legislation or regulations may result in delays in
payments or losses to Certificateholders.
Repurchase Obligations
The Company will represent and warrant under each Agreement that each Loan
complies with all requirements of law. Accordingly, if any Obligor has a claim
against the related Trust Fund for violation of any law and such claim
materially adversely affects the Trust Fund's interest in a Loan, such
violation would constitute a breach of a representation and warranty under the
Agreement and would create an obligation to repurchase such Loan unless the
breach is cured. See "Description of the Certificates--Conveyance of Loans."
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain fiduciary and prohibited transaction restrictions on employee
pension and welfare benefit plans subject to ERISA ("ERISA Plans"). Section
4975 of the Code imposes similar prohibited transaction restrictions on tax-
qualified retirement plans described in Section 401(a) of the Code ("Qualified
Retirement Plans") and on Individual Retirement Accounts ("IRAs") described in
Section 408 of the Code (collectively, "Tax-Favored Plans").
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA), are not subject to the ERISA requirements discussed
herein. Accordingly, assets of such plans may be invested in Certificates
without regard to the ERISA considerations described below, subject to the
provisions of applicable federal and state law. Any such plan that is a
Qualified Retirement Plan and exempt from taxation under Sections 401(a) and
501(a) of the Code, however, is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
In addition to imposing general fiduciary requirements, including those of
investment prudence and diversification and the requirement that a Plan's
investment be made in accordance with the documents governing the Plan, Section
406 of ERISA and Section 4975 of the Code prohibit a broad range of
transactions involving "plan assets" of ERISA Plans and Tax-Favored Plans
(collectively, "Plans") and persons ("Parties in Interest" under ERISA or
"Disqualified Persons" under the Code) who have certain specified relationships
to the Plans, unless a statutory or administrative exemption is available.
Certain Parties in Interest (or Disqualified Persons) that participate in a
prohibited transaction may be subject to a penalty (or an excise tax) imposed
pursuant to Section 502(i) of ERISA or Section 4975 of the Code, unless a
statutory or administrative exemption is available.
32
<PAGE>
Plan Asset Regulations
Certain transactions involving the Trust Fund might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Plan that
purchased Certificates, if assets of the Trust Fund were deemed to be assets of
the Plan. An investment of Plan Assets (as defined below) in Certificates may
cause the underlying assets included in the Trust to be deemed "plan assets" of
such Plan. The U.S. Department of Labor (the "DOL") has promulgated regulations
at 29 C.F.R. section 2510.3-101 (the "DOL Regulations") concerning whether or
not a Plan's assets would be deemed to include an interest in the underlying
assets of an entity (such as the Trust Fund), for purposes of applying the
general fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and the Code, when a Plan acquires an "equity
interest" (such as a Certificate) in such entity. Because of the factual nature
of certain of the rules set forth in the DOL Regulations, Plan Assets either
may be deemed to include an interest in the assets of the Trust Fund or may be
deemed merely to include its interest in the Certificates. Therefore, neither
Plans nor such entities should acquire or hold Certificates in reliance upon
the availability of any exception under the DOL Regulations. For purposes of
this Section the term "Plan Assets" or assets of a Plan has the meaning
specified in the DOL Regulations and includes an undivided interest in the
underlying assets of certain entities in which a Plan invests. The prohibited
transaction provisions of Section 406 of ERISA and Section 4975 of the Code may
apply to the Trust Fund and cause the Company, the Trust Fund, the Trustee, any
successor, or certain affiliates thereof, to be considered or become Parties in
Interest or Disqualified Persons with respect to an investing Plan (or of a
Plan holding an interest in such an entity). If so, the acquisition or holding
of Certificates by or on behalf of the investing Plan could also give rise to a
prohibited transaction under ERISA and the Code, unless some statutory or
administrative exemption is available. Certificates acquired by a Plan would be
assets of that Plan. Under the DOL Regulations, the Trust Fund, including the
assets held in the Trust Fund, may also be deemed to be assets of each Plan
that acquires Certificates. Special caution should be exercised before Plan
Assets are used to acquire a Certificate in such circumstances, especially if,
with respect to such assets, the Company, the Trust Fund, the Trustee, any
successor or an affiliate thereof either (i) has investment discretion with
respect to the investment of Plan Assets; or (ii) has authority or
responsibility to give (or regularly gives) investment advice with respect to
Plan Assets for a fee pursuant to an agreement or understanding that such
advice will serve as a primary basis for investment decisions with respect to
such assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan Assets and any person who provides investment
advice with respect to such assets for a fee (in the manner described above),
is a fiduciary of the investing Plan. If the assets of the Trust Fund were to
constitute Plan Assets then any party exercising management or discretionary
control regarding those assets may be deemed to be a Plan "fiduciary," and thus
subject to the fiduciary requirements of ERISA and the prohibited transaction
provisions of ERISA and Section 4975 of the Code with respect to any investing
Plan. In addition, if the assets of the Trust Fund were to constitute Plan
Assets, then the acquisition or holding of Certificates by, on behalf of or
with Plan Assets, as well as the operation of the Trust Fund, may constitute or
involve a prohibited transaction under ERISA and the Code.
No purchases of Certificates by, on behalf of or with Plan Assets of any Plan
will be registered unless the transferee, at its expense, delivers to the
Trustee, the Servicer and the Company an opinion of counsel (satisfactory to
the Trustee, the Servicer and the Company) that the purchase and holding of a
Certificate by, on behalf of, or with Plan Assets of such Plan is permissible
under applicable law, will not result in the assets of the Trust Fund being
deemed to be Plan Assets and subject to the prohibited transaction provisions
of ERISA and the Code and will not subject the Trustee, the Trust Fund, the
Company or the Servicer to any obligation or liability in addition to those
undertaken in the Agreement. Unless such opinion is delivered, each person
acquiring a Certificate will be deemed to represent to the Trustee, the Company
and the Servicer that such person is neither a Plan, nor acting on behalf of a
Plan, nor purchasing with Plan Assets of any Plan.
Consultation With Counsel
Any fiduciary or other Plan investor that proposes to acquire or hold
Certificates on behalf of or with Plan Assets of any Plan should consult with
its counsel with respect to the potential applicability of the fiduciary
33
<PAGE>
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and the Code to the proposed investment and the availability of any
prohibited transaction exemption, as well as other issues and their potential
consequences.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following is a general discussion of certain federal income tax
consequences relating to the purchase, ownership, and disposition of the
Certificates. The discussion is based upon laws, regulations, rulings, and
decisions now in effect, including Treasury Regulations issued on December 23,
1992, and generally effective for REMICs with startup days on or after November
12, 1991 (the "REMIC Regulations"), all of which are subject to change (which
change may be retroactive) or possibly differing interpretations. The
discussion does not purport to deal with federal income tax consequences
applicable to all categories of investors, some of which may be subject to
special rules. Investors should consult their own tax advisors to determine the
federal, state, local, and any other tax consequences of the purchase,
ownership, and disposition of the Certificates.
Many aspects of the federal tax treatment of the purchase, ownership, and
disposition of the Certificates will depend upon whether an election is made to
treat the Trust Fund or a segregated portion thereof evidenced by a particular
Series or sub-series of Certificates as a REMIC within the meaning of Section
860D(a) of the Internal Revenue Code of 1986, as amended (the "Code"). The
Prospectus Supplement for each series will indicate whether or not an election
to be treated as a REMIC has been or will be made with respect thereto. The
following discussion deals first with Series with respect to which a REMIC
Election is made and then with Series with respect to which a REMIC Election is
not made.
REMIC Series
With respect to each Series of Certificates for which a REMIC Election is
made, at the initial issuance of the Certificates in such Series the counsel to
the Company identified in the applicable Prospectus Supplement will have
advised the Company that in its opinion, assuming ongoing compliance with the
applicable Agreement, the Trust Fund will qualify as a REMIC and the
Certificates in such a Series ("REMIC Certificates") will be treated either as
regular interests in the REMIC within the meaning of Section 860G(a)(1) of the
Code ("Regular Certificates") or as residual interests in the REMIC within the
meaning of Section 860G(a)(2) of the Code ("Residual Certificates").
Qualification as a REMIC. Qualification as a REMIC involves ongoing
compliance with certain requirements and the following discussion assumes that
such requirements will be satisfied by the Trust Fund so long as there are any
REMIC Certificates outstanding. Substantially all of the assets of the REMIC
must consist of "qualified mortgages" and "permitted investments" as of the
close of the third month beginning after the day on which the REMIC issues all
of its regular and residual interests (the "Startup Day") and at all times
thereafter. The term "qualified mortgage" means any obligation (including a
participation or certificate of beneficial ownership in such obligation) which
is principally secured by an interest in real property that is transferred to
the REMIC on the Startup Day in exchange for regular or residual interests in
the REMIC or is purchased by the REMIC within the three-month period beginning
on the Startup Day pursuant to a fixed price contract in effect on the Startup
Day. The REMIC Regulations provide that a Loan is principally secured by an
interest in real property if the fair market value of the real property
securing the Loan is at least equal to either (i) 80% of the issue price
(generally, the principal balance) of the Loan at the time it was originated or
(ii) 80% of the adjusted issue price (the then-outstanding principal balance,
with certain adjustments) of the Loan at the time it is contributed to a REMIC.
The fair market value of the underlying real property is to be determined after
taking into account other liens encumbering that real property. Alternatively,
a Loan is principally secured by an interest in real property if substantially
all of the proceeds of the Loan were used to acquire or to improve or protect
an interest in real property that, at the origination date, is the only
security for the Loan
34
<PAGE>
(other than the personal liability of the obligor). A qualified mortgage also
includes a qualified replacement mortgage that is used to replace any qualified
mortgage within three months of the Startup Day or to replace a defective
mortgage within two years of the Startup Day.
"Permitted investments" consist of (a) temporary investments of cash received
under qualified mortgages before distribution to holders of interests in the
REMIC ("cash-flow investments"), (b) amounts, such as a Reserve Fund, if any,
reasonably required to provide for full payment of expenses of the REMIC, the
principal and interest due on regular or residual interests in the event of
defaults on qualified mortgages, lower than expected returns on cash-flow
investments, prepayment interest shortfalls or certain other contingencies
("qualified reserve assets"), and (c) certain property acquired as a result of
foreclosure of defaulted qualified mortgages ("foreclosure property"). A
reserve fund will not be qualified if more than 30% of the gross income from
the assets in the reserve fund is derived from the sale or other disposition of
property held for three months or less, unless such sale is necessary to
prevent a default in payment of principal or interest on Regular Certificates.
In accordance with Section 860G(a)(7) of the Code, a reserve fund must be
"promptly and appropriately" reduced as payments on contracts are received.
Foreclosure property will be a permitted investment only to the extent that
such property is not held for more than two years.
The Code requires that in order to qualify as a REMIC an entity must make
reasonable arrangements designed to ensure that certain specified entities,
generally including governmental entities or other entities that are exempt
from United States tax, including the tax on unrelated business income
("Disqualified Organizations"), not hold residual interests in the REMIC.
Consequently, it is expected that in the case of any Trust Fund for which a
REMIC Election is made the transfer, sale, or other disposition of a Residual
Certificate to a Disqualified Organization will be prohibited and the ability
of a Residual Certificate to be transferred will be conditioned on the
Trustee's receipt of a certificate or other document representing that the
proposed transferee is not a Disqualified Organization. The transferor of a
Residual Certificate must not, as of the time of the transfer, have actual
knowledge that such representation is false. The Code further requires that
reasonable arrangements must be made to enable a REMIC to provide the Internal
Revenue Service (the "Service") and certain other parties, including
transferors of residual interests in a REMIC, with the information needed to
compute the tax imposed by Section 860E(e)(1) of the Code if, in spite of the
steps taken to prevent Disqualified Organizations from holding residual
interests, such an organization does, in fact, acquire a residual interest. See
"REMIC Series--Restrictions on Transfer of Residual Certificates" below.
If the Trust Fund fails to comply with one or more of the ongoing
requirements for qualification as a REMIC, the Trust Fund will not be treated
as a REMIC for the year during which such failure occurs and thereafter unless
the Service determines, in its discretion, that such failure was inadvertent
(in which case, the Service may require any adjustments which it deems
appropriate). If the ownership interests in the assets of the Trust Fund
consist of multiple classes, failure to treat the Trust Fund as a REMIC may
cause the Trust Fund to be treated as an association taxable as a corporation.
Such treatment could result in income of the Trust Fund being subject to
corporate tax in the hands of the Trust Fund and in a reduced amount being
available for distribution to Certificateholders as a result of the payment of
such taxes.
Two-Tier REMIC Structures. For certain series of Certificates, two separate
elections may be made to treat segregated portions of the assets of a single
Trust Fund as REMICs for federal income tax purposes (respectively, the
"Subsidiary REMIC" and the "Master REMIC"). Upon the issuance of any such
series of Certificates, Counsel will have advised the Company, as described
above, that at the initial issuance of the Certificates, the Subsidiary REMIC
and the Master REMIC will each qualify as a REMIC for federal income tax
purposes, and that the Certificates in such a series will be treated either as
Regular Certificates or Residual Certificates of the appropriate REMIC. Only
REMIC Certificates issued by the Master REMIC will be offered hereunder. Solely
for the purpose of determining whether such Regular Certificates will
constitute qualifying real estate or real property assets for certain
categories of financial institutions or real estate investment trusts as
described below, both REMICs in a two-tier REMIC structure will be treated as
one. See the discussion below under "REMIC Series--Taxation of Regular
Interests."
35
<PAGE>
Taxation of Regular Interests. Regular Certificates will be treated as new
debt instruments issued by the REMIC on the Startup Day. If a Regular
Certificate represents an interest in a REMIC that consists of a specified
portion of the interest payments on the REMIC's qualified mortgages, the stated
principal amount with respect to that Regular Certificate may be zero. Such a
specified portion may consist of a fixed number of basis points, a fixed
percentage of interest or a qualified variable rate on some or all of the
qualified mortgages. Stated interest on a Regular Certificate will be taxable
as ordinary income. Holders of Regular Certificates that would otherwise report
income under a cash method of accounting will be required to report income with
respect to such Regular Certificates under the accrual method. Under Temporary
Treasury Regulations, if a Trust Fund, with respect to which a REMIC Election
is made, is considered to be a "single-class REMIC," a portion of the REMIC's
servicing fees, administrative and other non-interest expenses, including
assumption fees and late payment charges retained by the Company, will be
allocated as a separate item of gross income and as a separate item of expense
to those Regular Certificateholders that are "pass-through interest holders."
Generally, a single-class REMIC is defined as a REMIC that would be treated as
a fixed investment trust under applicable law but for its qualification as a
REMIC, or a REMIC that is substantially similar to an investment trust but is
structured with the principal purpose of avoiding this allocation requirement
imposed by the Temporary Treasury Regulations. Generally, a pass-through
interest holder refers to individuals, trusts and estates, certain other pass-
through entities beneficially owned by one or more individuals, trusts or
estates, and regulated investment companies. Such an individual, estate, trust
or pass-through entity that holds a Regular Certificate in such a REMIC will be
allowed to deduct the foregoing separate item of expense under Section 212 of
the Code only to the extent that, in the aggregate and combined with certain
other itemized deductions, it exceeds 2% of the adjusted gross income of the
holder. In addition, Section 68 of the Code provides that the amount of
itemized deductions (including those provided for in Section 212 of the Code)
otherwise allowable for the taxable year for an individual whose adjusted gross
income exceeds a threshold amount specified in the Code ($126,600 for 1999, in
the case of a joint return) will be reduced by the lesser of (i) 3% of the
excess of adjusted gross income over the specified threshold amount or (ii) 80%
of the amount of itemized deductions otherwise allowable for such taxable year.
Furthermore, in determining the alternative minimum taxable income of such an
individual, trust, estate or pass-through entity that is a holder of a Regular
Certificate in such a REMIC, no deduction will be allowed for such holder's
allocable portion of the foregoing expenses, even though an amount equal to the
total of such expenses will be included in such holder's gross income for
alternative minimum tax purposes. Unless otherwise stated in the related
Prospectus Supplement, the foregoing expenses will not be allocated to holders
of a Regular Certificate in a REMIC. If the foregoing limitations apply,
certain holders of Regular Certificates in "single-class REMICs" may not be
entitled to deduct all or any part of the foregoing expenses. Accordingly,
Regular Certificates in such a "single class-REMIC" may not be appropriate
investments for individuals, trusts, estates or pass-through entities
beneficially owned by one or more individuals, trusts or estates. Such
prospective investors should carefully consult with their own tax advisors
prior to making an investment in any such Regular Certificates.
Tax Status of REMIC Certificates. In general, (i) Regular Certificates held
by a thrift institution taxed as a "domestic building and loan association"
within the meaning of Section 7701(a)(19) of the Code will constitute "a
regular ... interest in a REMIC" within the meaning of Section
7701(a)(19)(C)(xi) of the Code; and (ii) Regular Certificates held by a real
estate investment trust will constitute "real estate assets" within the meaning
of Section 856(c)(5)(A) of the Code and interest thereon will be considered
"interest on obligations secured by mortgages on real property" within the
meaning of Section 856(c)(3)(B) of the Code. If less than 95% of the average
adjusted basis of the assets comprising the REMIC are assets qualifying under
any of the foregoing Sections of the Code (including assets described in
Section 7701(a)(19)(C) of the Code), then the Regular Certificates will be
qualifying assets only to the extent that the assets comprising the REMIC are
qualifying assets. Furthermore, interest paid with respect to Certificates held
by a real estate investment trust will be considered "interest on obligations
secured by mortgages on real property or on interests in real property" within
the meaning of Section 856(c)(3)(B) of the Code to the same extent that the
Certificates themselves are treated as real estate assets. Regular Certificates
held by a regulated investment company or a real estate investment trust will
not constitute "Government securities" within the meaning of Sections
851(b)(4)(A)(i) and 856(c)(5)(A) of the Code, respectively. In addition, the
REMIC Regulations provide that
36
<PAGE>
payments on Loans held and reinvested pending distribution to
Certificateholders will be considered to be "real estate assets" within the
meaning of Section 856(c)(5)(A) of the Code. Entities affected by the foregoing
provisions of the Code that are considering the purchase of Certificates should
consult their own tax advisors regarding these provisions.
Original Issue Discount. Regular Certificates may be issued with "original
issue discount." Rules governing original issue discount are set forth in
Sections 1271-1273 and 1275 of the Code and the Treasury Regulations issued
thereunder in January 1994 (the "OID Regulations"). The discussion herein is
based in part on the OID Regulations, which generally apply to debt instruments
issued on or after April 4, 1994, but which generally may be relied upon for
debt instruments issued after December 21, 1992. Moreover, although the rules
relating to original issue discount contained in the Code were modified by the
Tax Reform Act of 1986 specifically to address the tax treatment of securities,
such as the Regular Certificates, on which principal is required to be prepaid
based on prepayments of the underlying assets, regulations under that
legislation have not yet been issued. Nonetheless, the Code requires that a
prepayment assumption be used with respect to the underlying assets of a REMIC
in computing the accrual of original issue discount on Regular Certificates,
and that regular adjustments be made in the amount and the rate of accrual to
reflect differences between the actual prepayment rate and the prepayment
assumption. Although regulations have not been issued concerning the use of a
prepayment assumption, the legislative history associated with the Tax Reform
Act of 1986 indicates that such regulations are to provide that the prepayment
assumption used with respect to a Regular Certificate must be the same as that
used in pricing the initial offering of such Regular Certificate. The
prepayment assumption (the "Prepayment Assumption") used in reporting original
issue discount for each series of Regular Certificates will be consistent with
this standard and will be disclosed in the related Prospectus Supplement.
However, no representation is made hereby nor can there be any assurance that
the underlying assets of a REMIC will in fact prepay at a rate conforming to
the prepayment assumption or at any other rate. Certificateholders also should
be aware that the OID Regulations do not address certain issues relevant to, or
are not applicable to, prepayable securities such as the Regular Certificates.
In general, in the hands of the original holder of a Regular Certificate,
original issue discount, if any, is the difference between the "stated
redemption price at maturity" of the Regular Certificate and its "issue price."
The original issue discount with respect to a Regular Certificate will be
considered to be zero if it is less than .25% of the Regular Certificate's
stated redemption price at maturity multiplied by the number of complete years
from the date of issue of such Regular Certificate to its maturity date. The
OID Regulations, however, provide a special de minimis rule to apply to
obligations such as the Regular Certificates that have more than one principal
payment or that have interest payments that are not qualified stated interest
as defined in the OID Regulations, payable before maturity ("installment
obligations"). Under the special rule, original issue discount on an
installment obligation is generally considered to be zero if it is less than
.25% of the principal amount of the obligation multiplied by the weighted
average maturity of the obligation as defined in the OID Regulations. Because
of the possibility of prepayments, it is not clear whether or how the de
minimis rules will apply to the Regular Certificates. As described above, it
appears that the Prepayment Assumption will be required to be used in
determining the weighted average maturity of the Regular Certificates. In the
absence of authority to the contrary, the Company expects to apply the de
minimis rule applicable to installment obligations by using the Prepayment
Assumption.
Generally, the original holder of a Regular Certificate that includes a de
minimis amount of original issue discount (other than de minimis original issue
discount attributable to a so-called "teaser" interest rate or initial interest
rate holiday) includes that original issue discount in income as principal
payments are made. The amount includable in income with respect to each
principal payment equals a pro rata portion of the entire amount of de minimis
original issue discount with respect to that Regular Certificate. Any de
minimis amount of original issue discount includable in income by a holder of a
Regular Certificate is generally treated as a capital gain if the Regular
Certificate is a capital asset in the hands of the holder thereof. Pursuant to
the OID Regulations, a holder of a Regular Certificate that uses the accrual
method of tax accounting or that acquired such Regular Certificate on or after
April 4, 1994, may, however, elect to include in gross income all interest
37
<PAGE>
that accrues on a Regular Certificate, including any de minimis original issue
discount and market discount, by using the constant yield method described
below with respect to original issue discount.
The stated redemption price at maturity of a Regular Certificate generally
will be equal to the sum of all payments, whether denominated as principal or
interest, to be made with respect thereto other than "qualified stated
interest." Pursuant to the OID Regulations, qualified stated interest is stated
interest that is unconditionally payable at least annually at a single fixed
rate of interest (or, under certain circumstances, a variable rate tied to an
objective index) during the entire term of the Regular Certificate (including
short periods). Under the OID Regulations, interest is considered
unconditionally payable only if late payment or nonpayment is expected to be
penalized or reasonable remedies exist to compel payment. It is possible that
interest payable on Regular Certificates may not be considered to be
unconditionally payable under the OID Regulations because Regular
Certificateholders may not have default remedies ordinarily available to
holders of debt instruments or because no penalties are imposed as a result of
any failure to make interest payments on the Regular Certificates. Until
further guidance is issued, however, the REMIC will treat the interest on
Regular Certificates as unconditionally payable under the OID Regulations. In
addition, under the OID Regulations, certain variable interest rates payable on
Regular Certificates, including rates based upon the weighted average interest
rate of a Loan Pool, may not be treated as qualified stated interest. In such
case, the OID Regulations would treat interest under such rates as contingent
interest which generally must be included in income by the Regular
Certificateholder when the interest becomes fixed, as opposed to when it
accrues. Until further guidance is issued concerning the treatment of such
interest payable on Regular Certificates, the REMIC will treat such interest as
being payable at a variable rate tied to a single objective index of market
rates. Prospective investors should consult their tax advisors regarding the
treatment of such interest under the OID Regulations. In the absence of
authority to the contrary and if otherwise appropriate, the Company expects to
determine the stated redemption price at maturity of a Regular Certificate by
assuming that the anticipated rate of prepayment for all Loans will occur in
such a manner that the initial Pass-Through Rate for a Certificate will not
change. Accordingly, interest at the initial Pass-Through Rate will constitute
qualified stated interest payments for purposes of applying the original issue
discount provisions of the Code. In general, the issue price of a Regular
Certificate is the first price at which a substantial amount of the Regular
Certificates of such class are sold for money to the public (excluding bond
houses, brokers or similar persons or organizations acting in the capacity of
underwriters, placement agents or wholesalers). If a portion of the initial
offering price of a Regular Certificate is allocable to interest that has
accrued prior to its date of issue, the issue price of such a Regular
Certificate generally includes that pre-issuance accrued interest.
If the Regular Certificates are determined to be issued with original issue
discount, a holder of a Regular Certificate must generally include the original
issue discount in ordinary gross income for federal income tax purposes as it
accrues in advance of the receipt of any cash attributable to such income. The
amount of original issue discount, if any, required to be included in a Regular
Certificateholder's ordinary gross income for federal income tax purposes in
any taxable year will be computed in accordance with Section 1272(a) of the
Code and the OID Regulations. Under such Section and the OID Regulations,
original issue discount accrues on a daily basis under a constant yield method
that takes into account the compounding of interest. The amount of original
issue discount to be included in income by a holder of a debt instrument, such
as a Regular Certificate, under which principal payments may be subject to
acceleration because of prepayments of other debt obligations securing such
instruments, is computed by taking into account the Prepayment Assumption.
The amount of original issue discount includable in income by a holder of a
Regular Certificate is the sum of the "daily portions" of the original issue
discount for each day during the taxable year on which the holder held the
Regular Certificate. The daily portions of original issue discount are
determined by allocating to each day in any accrual period a pro rata portion
of the excess, if any, of the sum of (i) the present value of all remaining
payments to be made on the Regular Certificate as of the close of the accrual
period and (ii) the payments during the accrual period of amounts included in
the stated redemption price of the Regular Certificate over the adjusted issue
price of the Regular Certificate at the beginning of the accrual period.
Generally, the accrual period for the Regular Certificates corresponds to the
intervals at which amounts are paid
38
<PAGE>
or compounded with respect to such Regular Certificate, beginning with their
date of issuance and ending with the maturity date. The "adjusted issue price"
of a Regular Certificate at the beginning of any accrual period is the sum of
the issue price and accrued original issue discount for each prior accrual
period reduced by the
amount of payments other than payments of qualified stated interest made during
each prior accrual period. The Code requires the present value of the remaining
payments to be determined on the bases of (a) the original yield to maturity
(determined on the basis of compounding at the close of each accrual period and
properly adjusted for the length of the accrual period), (b) events, including
actual prepayments, which have occurred before the close of the accrual period,
and (c) the assumption that the remaining payments will be made in accordance
with the original Prepayment Assumption. The effect of this method is to
increase the portions of original issue discount that a Regular
Certificateholder must include in income to take into account prepayments with
respect to the Loans held by the Trust Fund that occur at a rate that exceeds
the Prepayment Assumption and to decrease (but not below zero for any period)
the portions of original issue discount that a Regular Certificateholder must
include in income to take into account prepayments with respect to the Loans
that occur at a rate that is slower than the Prepayment Assumption. Although
original issue discount will be reported to Regular Certificateholders based on
the Prepayment Assumption, no representation is made to Regular
Certificateholders that the Loans will be prepaid at that rate or at any other
rate.
A subsequent purchaser of a Regular Certificate will also be required to
include in such purchaser's ordinary gross income for federal income tax
purposes the original issue discount, if any, accruing with respect to such
Regular Certificate, unless the price paid equals or exceeds the Regular
Certificate's remaining stated redemption price. If the price paid exceeds the
Regular Certificate's adjusted issue price, but does not equal or exceed the
remaining stated redemption price of the Regular Certificate, the amount of
original issue discount to be accrued will be reduced in accordance with a
formula set forth in Section 1272(a)(7)(B) of the Code. Under this provision,
the daily portions of original issue discount which must be included in gross
income will be reduced by an amount equal to such daily portion multiplied by
the fraction obtained by dividing (i) the excess of the purchase price therefor
over the Regular Certificate's adjusted issue price by (ii) the aggregate
original issue discount remaining to be accrued with respect to such Regular
Certificate.
The Company believes that the holder of a Regular Certificate determined to
be issued with more than de minimis original issue discount will be required to
include the original issue discount in ordinary gross income for federal income
tax purposes computed in the manner described above. However, the OID
Regulations either do not address or are subject to varying interpretations
with respect to several issues concerning the computation of original issue
discount for obligations such as the Regular Certificates.
Adjustable Rate Regular Certificates. Regular Certificates may bear interest
at an adjustable rate. Under the OID Regulations, if an adjustable rate Regular
Certificate provides for qualified stated interest payments computed on the
basis of certain qualified floating rates or objective rates, then any original
issue discount on such a Regular Certificate may be computed and accrued under
the same methodology that applies to Regular Certificates paying qualified
stated interest at a fixed rate. See the discussion above under "REMIC Series--
Original Issue Discount." If adjustable rate Regular Certificates are issued,
the related Prospectus Supplement will describe the manner in which the
original issue discount rules may be applied with respect thereto and the
method to be used in preparing information returns to the holders of such
adjustable rate Regular Certificates and to the Service.
For purposes of applying the original issue discount provisions of the Code,
all or a portion of the interest payable with respect to adjustable rate
Regular Certificate may not be treated as qualified stated interest in certain
circumstances, including the following: (i) if the adjustable rate of interest
is subject to one or more minimum or maximum rate floors or ceilings which are
not fixed throughout the term of the Regular Certificate and which are
reasonably expected as of the issue date to cause the rate in certain accrual
periods to be significantly higher or lower than the overall expected return on
the Regular Certificate determined without such floor or ceiling; (ii) if it is
reasonably expected that the average value of the adjustable rate during the
first half of the term of the Regular Certificate will be either significantly
less than or significantly greater than the average value of the rate during
the final half of the term of the Regular Certificate; or (iii) if interest is
not
39
<PAGE>
payable in all circumstances. In these situations, as well as others, it is
unclear under the OID Regulations whether such interest payments constitute
qualified stated interest payments, or must be treated as part of a Regular
Certificate's stated redemption price at maturity resulting in original issue
discount.
Market Discount. Regular Certificates, whether or not issued with original
issue discount, will be subject to the market discount rules of the Code. A
purchaser of a Regular Certificate who purchases the Regular Certificate at a
market discount (i.e., a discount from its adjusted issue price as described
above) will be required to recognize accrued market discount as ordinary income
as payments of principal are received on such Regular Certificate or upon the
sale or exchange of the Regular Certificate. In general, the holder of a
Regular Certificate may elect to treat market discount as accruing either (i)
under a constant yield method that is similar to the method for the accrual of
original issue discount or (ii) under a ratable accrual method (pursuant to
which the market discount is treated as accruing in equal daily installments
during the period the Regular Certificate is held by the purchaser), in each
case computed taking into account the Prepayment Assumption. Because the
regulations referred to above have not been issued, it is not possible to
predict what effect, if any, such regulations, when issued, might have on the
tax treatment of a Regular Certificate purchased at a discount in the secondary
market.
The Code provides that the market discount in respect of a Regular
Certificate will be considered to be zero if the amount allocable to the
Regular Certificate is less than 0.25% of the Regular Certificate's stated
redemption price at maturity multiplied by the number of complete years
remaining to its maturity after the holder acquired the obligation. If market
discount is treated as de minimis under this rule, the actual discount would be
allocated among a portion of each scheduled distribution representing the
stated redemption price of such Regular Certificate and that portion of the
discount allocable to such distribution would be reported as income when such
distribution occurs or is due.
The Code further provides that any principal payment with respect to a
Regular Certificate acquired with market discount or any gain on disposition of
such a Regular Certificate shall be treated as ordinary income to the extent it
does not exceed the accrued market discount at the time of such payment. The
amount of accrued market discount for purposes of determining the amount of
ordinary income to be recognized with respect to subsequent payments on such a
Regular Certificate is to be reduced by the amount previously treated as
ordinary income.
In general, limitations imposed by the Code that are intended to match
deductions with the taxation of income will require a holder of a Regular
Certificate having market discount to defer a portion of the interest
deductions attributable to any indebtedness incurred or continued to purchase
or carry such Regular Certificate. Alternatively, a holder of a Regular
Certificate may elect to include market discount in gross income as it accrues
and, if he makes such an election, is exempt from this rule. The adjusted basis
of a Regular Certificate subject to such election will be increased to reflect
market discount included in gross income, thereby reducing any gain or
increasing any loss on a sale or taxable disposition.
Amortizable Premium. A holder of a Regular Certificate who holds the Regular
Certificate as a capital asset and who purchased the Regular Certificate at a
cost greater than its stated redemption price at maturity will be considered to
have purchased the Regular Certificate at a premium. In general, the Regular
Certificateholder may elect to deduct the amortizable bond premium as it
accrues under a constant yield method. A Regular Certificateholder's tax basis
in the Regular Certificate will be reduced by the amount of the amortizable
bond premium deducted. It appears that the Prepayment Assumption should be
taken into account in determining the term of a Regular Certificate for this
purpose. Amortizable bond premium with respect to a Regular Certificate will be
treated as an offset to interest income on such Regular Certificate, and a
Certificateholder's deduction for amortizable bond premium will be limited in
each year to the amount of interest income derived with respect to such Regular
Certificate for such year. Any election to deduct amortizable bond premium will
apply to all debt instruments (other than instruments the interest on which is
excludable from gross income) held by the Certificateholder at the beginning of
the first taxable year to which the election applies or thereafter acquired,
and may be revoked only with the consent of the Service. Bond
40
<PAGE>
premium on a Regular Certificate held by a Certificateholder who does not elect
to deduct the premium will decrease the gain or increase the loss otherwise
recognized on the disposition of the Regular Certificate. Certificateholders
who pay a premium for a Regular Certificate should consult their tax advisors
concerning such an election and rules for determining the method for amortizing
bond premium.
Realized Losses. Holders of a Regular Certificate acquired in connection
with a trade or business should be allowed to deduct as ordinary losses any
losses sustained during a taxable year in which the Regular Certificates become
wholly or partially worthless as a result of one or more realized losses on the
underlying assets of the REMIC. However, it appears that a noncorporate holder
of a Regular Certificate that does not acquire such certificate in connection
with a trade or business may not be entitled to deduct such a loss until such
holder's certificate becomes wholly worthless, which may not occur until its
outstanding principal balance has been reduced to zero. Any such loss may be
characterized as a short-term capital loss.
At present, the law is unclear with respect to the timing and character of
any loss which may be realized by a holder of a Regular Certificate. Such a
holder may be required to accrue interest and original issue discount with
respect to such Regular Certificate without giving effect to any defaults or
deficiencies on the underlying assets of the REMIC until such holder can
establish that such losses will not be recoverable under any circumstances. As
a result, the holder of a Regular Certificate may be required to report taxable
income in excess of the amount of economic income actually accruing to the
benefit of such holder in a particular period. It is expected, however, that
the holder of such a Regular Certificate would eventually recognize a loss or
reduction in income attributable to such income when such loss is, in fact,
realized for federal income tax purposes.
Gain or Loss on Disposition. If a Regular Certificate is sold, the seller
will recognize gain or loss equal to the difference between the amount realized
from the sale and the seller's adjusted basis in such Regular Certificate. The
adjusted basis generally will equal the cost of such Regular Certificate to the
seller, increased by any original issue discount included in the seller's
ordinary gross income with respect to such Regular Certificate and reduced (but
not below zero) by any payments on the Regular Certificate previously received
or accrued by the seller (other than qualified stated interest payments) and
any amortizable premium. Except as discussed below or with respect to market
discount, any gain or loss recognized upon a sale, exchange, retirement, or
other taxable disposition of a Regular Certificate will be capital gain if the
Regular Certificate is held as a capital asset.
Gain from the disposition of a Regular Certificate that might otherwise be
capital gain, including any gain attributable to de minimis original issue
discount or market discount, will be treated as ordinary income to the extent
of the excess, if any, of (i) the amount that would have been includable in the
holder's income if the yield on such Regular Certificate had equaled 110% of
the applicable federal rate determined as of the beginning of such holder's
holding period, over (ii) the amount of ordinary income actually recognized by
the holder with respect to such Regular Certificate.
Taxation of Residual Interests. Generally, the "daily portions" of the
taxable income or net loss of a REMIC will be includable as ordinary income or
loss in determining the taxable income of holders of Residual Certificates
("Residual Holders"), and will not be taxed separately to the REMIC. The daily
portions are determined by allocating the REMIC's taxable income or net loss
for each calendar quarter ratably to each day in such quarter and by allocating
such daily portion among the Residual Holders in proportion to their respective
holdings of Residual Certificates in the REMIC on such day.
REMIC taxable income is generally determined in the same manner as the
taxable income of an individual using the accrual method of accounting except
that (i) the limitation on deductibility of investment interest expense and
expenses for the production of income do not apply, (ii) all bad loans will be
deductible as business bad debts, and (iii) the limitation on the deductibility
of interest and expenses related to tax-exempt income will apply. REMIC taxable
income generally means a REMIC's gross income, including interest, original
issue discount income, and market discount income, if any, on the Loans, plus
any cancellation of
41
<PAGE>
indebtedness income due to realized losses with respect to Regular Certificates
and income on reinvestment of cash flows and reserve assets, minus deductions,
including interest and original issue discount expense on the Regular
Certificates, bad debt losses with respect to the underlying assets of a REMIC,
servicing fees on the Loans, other administrative expenses of a REMIC, and
amortization of premium, if any, with respect to the Loans.
The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
interest, original issue discount or market discount income, or amortization of
premium with respect to the Loans, on the one hand, and the timing of
deductions for interest (including original issue discount) on the Regular
Certificates, on the other hand. In the event that an interest in the Loans is
acquired by a REMIC at a discount, and one or more of such Loans is prepaid,
the Residual Holder may recognize taxable income without being entitled to
receive a corresponding cash distribution because (i) the prepayment may be
used in whole or in part to make distributions on Regular Certificates, and
(ii) the discount on the Loans which is includable in a REMIC's income may
exceed its deduction with respect to the distributions on those Regular
Certificates. When there is more than one class of Regular Certificates that
receive payments sequentially (i.e., a fast-pay, slow-pay structure), this
mismatching of income and deductions is particularly likely to occur in the
early years following issuance of the Regular Certificates, when distributions
are being made in respect of earlier classes of Regular Certificates to the
extent that such classes are not issued with substantial discount. If taxable
income attributable to such a mismatching is realized, in general, losses would
be allowed in later years as distributions on the later classes of Regular
Certificates are made. Taxable income may also be greater in earlier years than
in later years as a result of the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of Regular
Certificates, may increase over time as distributions are made on the lower
yielding classes of Regular Certificates, whereas interest income with respect
to any given Loan will remain constant over time as a percentage of the
outstanding principal amount of that loan (assuming it bears interest at a
fixed rate). Consequently, Residual Holders must have sufficient other sources
of cash to pay any federal, state, or local income taxes due as a result of
such mismatching, or such holders must have unrelated deductions against which
to offset such income, subject to the discussion of "excess inclusions" below
under "REMIC Series--Limitations on Offset or Exemption of REMIC Income." The
mismatching of income and deductions described in this paragraph, if present
with respect to a series of Certificates, may have a significant adverse effect
upon the Residual Holder's after-tax rate of return.
The amount of any net loss of a REMIC that may be taken into account by the
Residual Holder is limited to the adjusted basis of the Residual Certificate as
of the close of the quarter (or time of disposition of the Residual Certificate
if earlier), determined without taking into account the net loss for the
quarter. The initial adjusted basis of a purchaser of a Residual Certificate is
the amount paid for such Residual Certificate. Such adjusted basis will be
increased by the amount of taxable income of the REMIC reportable by the
Residual Holder and decreased (but not below zero) by the amount of loss of the
REMIC reportable by the Residual Holder. A cash distribution from the REMIC
also will reduce such adjusted basis (but not below zero). Any loss that is
disallowed on account of this limitation may be carried over indefinitely by
the Residual Holder for whom such loss was disallowed and may be used by such
Residual Holder only to offset any income generated by the same REMIC.
If a Residual Certificate has a negative value, it is not clear whether its
issue price would be considered to be zero or such negative amount for purposes
of determining the REMIC's basis in its assets. The REMIC Regulations imply
that residual interests cannot have a negative basis or a negative issue price.
However, the preamble to the REMIC Regulations indicates that, while existing
tax rules do not accommodate such concepts, the Service is considering the tax
treatment of these types of residual interests, including the proper tax
treatment of a payment made by the transferor of such a residual interest to
induce the transferee to acquire that interest. Absent regulations or
administrative guidance to the contrary, the Company does not intend to treat a
class of Residual Certificates as having a value of less than zero for purposes
of determining the basis of the related REMIC in its assets.
42
<PAGE>
Further, to the extent that the initial adjusted basis of a Residual Holder
(other than an original holder) in the Residual Certificate is in excess of the
corresponding portion of the REMIC's basis in the Loans, the Residual Holder
will not recover such excess basis until termination of the REMIC unless
Treasury Regulations yet to be issued provide for periodic adjustments to the
REMIC income otherwise reportable by such holder.
Treatment of Certain Items of REMIC Income and Expense. Generally, a REMIC's
deductions for original issue discount will be determined in the same manner,
and subject to the same uncertainties, as original issue discount income on
Regular Certificates as described above under "REMIC Series--Original Issue
Discount" and "--Adjustable Rate Regular Certificates," without regard to the
de minimis rule described therein.
The REMIC will have market discount income in respect of the Loans if, in
general, the basis of the REMIC in such Loans is exceeded by their unpaid
principal balances. The REMIC's basis in such Loans is generally the fair
market value of the Loans immediately after the transfer thereof to the REMIC
(which will equal the aggregate issue prices of the REMIC Certificates which
are sold to investors and the estimated fair market value of any classes of
Certificates which are retained). In respect of the Loans that have market
discount to which Code Section 1276 applies, the accrued portion of such market
discount would be recognized currently as an item of ordinary income. Market
discount income generally should accrue in the manner described above under
"REMIC Series--Market Discount."
Generally, if the basis of a REMIC in the Loans exceeds the unpaid principal
balances thereof, the REMIC will be considered to have acquired such Loans at a
premium equal to the amount of such excess. As stated above, the REMIC's basis
in the Loans is the fair market value of the Loans immediately after the
transfer thereof to the REMIC. Generally, a REMIC that holds a Loan as a
capital asset will elect to amortize premium on the Loans under a constant
interest method. See the discussion under "REMIC Series--Amortizable Premium."
Limitations on Offset or Exemption of REMIC Income. A portion (or all) of the
REMIC taxable income includable in determining the federal income tax liability
of a Residual Holder will be subject to special treatment. That portion,
referred to as the "excess inclusion," is equal to the excess of REMIC taxable
income for the calendar quarter allocable to a Residual Certificate over the
daily accruals for such quarterly period of (i) 120% of the long-term
applicable Federal rate that would have applied to the Residual Certificate (if
it were a debt instrument) on the Startup Day under Section 1274(d) of the
Code, multiplied by (ii) the adjusted issue price of such Residual Certificate
at the beginning of such quarterly period. For this purpose, the adjusted issue
price of a Residual Certificate at the beginning of a quarter is the issue
price of the Residual Certificate, plus the amount of such daily accruals of
REMIC income described in this paragraph for all prior quarters, decreased by
any distributions made with respect to such Residual Certificate prior to the
beginning of such quarterly period.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions will be subject to federal income tax in all events and may
not be offset by other deductions on such Residual Holder's tax return,
including net operating loss carry forwards. Further, if the Residual Holder is
an organization subject to the tax on unrelated business income imposed by
Section 511 of the Code, the Residual Holder's excess inclusions will be
treated as unrelated business taxable income of such Residual Holder for
purposes of Section 511. In addition, if the Residual Holder is not a U.S.
person, such Residual Holder's excess inclusions generally would be ineligible
for exemption from or reduction in the rate of United States withholding tax.
Finally, if a real estate investment trust or regulated investment company owns
a Residual Certificate, a portion (allocated under Treasury Regulations yet to
be issued) of dividends paid by such real estate investment trust or regulated
investment company could not be offset by net operating losses of its
shareholders and would constitute unrelated business taxable income for tax-
exempt shareholders.
Furthermore, for purposes of the alternative minimum tax, (i) excess
inclusions will not be permitted to be offset by the alternative tax net
operating loss deduction and (ii) alternative minimum taxable income may not be
less than the taxpayer's excess inclusions. The latter rule has the effect of
preventing nonrefundable tax
43
<PAGE>
credits from reducing the taxpayer's income tax to an amount lower than the
tentative minimum tax on excess inclusions.
Restrictions on Transfer of Residual Certificates. As described above under
"REMIC Series--Qualification as a REMIC," an interest in a Residual Certificate
may not be transferred to a Disqualified Organization. If any legal or
beneficial interest in a Residual Certificate is, nonetheless, transferred to a
Disqualified Organization, a tax would be imposed in an amount equal to the
product of (i) the present value of the total anticipated excess inclusions
with respect to such Residual Certificate for periods after the transfer, and
(ii) the highest marginal federal income tax rate applicable to corporations.
The anticipated excess inclusions are based on actual prepayment experience to
the date of the transfer and projected payments based on the Prepayment
Assumption. The present value rate equals the applicable federal rate under
Section 1274(d) of the Code as of the date of the transfer for a term ending on
the close of the last quarter in which excess inclusions are expected to
accrue. Such rate is applied to the anticipated excess inclusions from the end
of the remaining calendar quarters in which they arise to the date of the
transfer. Such a tax generally would be imposed on the transferor of the
Residual Certificate, except that where such transfer is through an agent
(including a broker, nominee, or other middleman) for a Disqualified
Organization, the tax would instead be imposed on such agent. However, a
transferor of a Residual Certificate would in no event be liable for such tax
with respect to a transfer if the transferee furnishes to the transferor an
affidavit, under penalties of perjury, that the transferee is not a
Disqualified Organization and, as of the time of the transfer, the transferor
does not have actual knowledge that such affidavit is false. The tax also may
be waived by the Treasury Department if the Disqualified Organization promptly
disposes of the residual interest and the transferor pays such amount of tax as
the Treasury Department may require (presumably, a corporate tax on the excess
inclusion for the period the residual interest is actually held by the
Disqualified Organization).
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions on the Residual Certificate that are allocable
to the interest in the Pass-Through Entity during the period such interest is
held by such Disqualified Organization, and (ii) the highest marginal federal
income tax rate imposed on corporations. Such tax would be deductible from the
ordinary gross income of the Pass-Through Entity for the taxable year. The
Pass-Through Entity would not be liable for such tax if it has received an
affidavit from such record holder that it is not a Disqualified Organization
and, during the period such person is the record holder of the Residual
Certificate, the Pass-Through Entity does not have actual knowledge that such
affidavit is false.
For these purposes, a "Pass-Through Entity" means any regulated investment
company, real estate investment trust, common trust fund, partnership, trust or
estate and certain corporations operating on a cooperative basis. Except as may
be provided in Treasury Regulations, any person holding an interest in a Pass-
Through Entity as a nominee for another will, with respect to such interest, be
treated as a Pass-Through Entity.
Noneconomic Residual Interests. The REMIC Regulations would disregard certain
transfers of Residual Certificates, in which case the transferor would continue
to be treated as the owner of the Residual Certificates and thus would continue
to be subject to tax on its allocable portion of the net income of the REMIC.
Under the REMIC Regulations, a transfer of a "noneconomic residual interest"
(as defined below) to a Residual Holder is disregarded for all federal income
tax purposes if a significant purpose of the transfer is to enable the
transferor to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "noneconomic residual interest" unless, at the time of transfer, (i) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect for the year in
which the transfer occurs, and (ii) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes. The anticipated excess inclusions and the present
value rate are determined in the same manner as set forth above. The REMIC
Regulations explain that a significant
44
<PAGE>
purpose to impede the assessment or collection of tax exists if the transferor,
at the time of the transfer, either knew or should have known that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. A safe harbor is provided if (i) the transferor
conducted, at the time of the transfer, a reasonable investigation of the
financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts as
they came due in the future, and (ii) the transferee represents to the
transferor that it understands that, as the holder of a non-economic residual
interest, the transferee may incur tax liabilities in excess of any cash flows
generated by the interest and that the transferee intends to pay taxes
associated with holding the residual interest as they become due. The Agreement
with respect to each series of REMIC Certificates will require the transferee
of a Residual Certificate to certify to the statements in clause (ii) of the
preceding sentence as part of the affidavit described above under "Restrictions
on Transfer of Residual Certificates."
Mark-to-Market Rules. On December 24, 1996, the Service released final
regulations (the "Mark-to-Market Regulations") relating to the requirement that
a securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities owned by a dealer, except
to the extent that the dealer has specifically identified a security as held
for investment. The Mark-to-Market Regulations provide that for purposes of
this mark-to-market requirement, a Residual Certificate acquired on or after
January 4, 1995 is not treated as a security and thus may not be marked to
market. Prospective purchasers of a Residual Certificate should consult their
tax advisors regarding the possible application of the mark-to-market
requirement to Residual Certificates.
Sale or Exchange of a Residual Certificate. Upon the sale or exchange of a
Residual Certificate, the Residual Holder will recognize gain or loss equal to
the excess, if any, of the amount realized over the adjusted basis as described
above of such Residual Holder in such Residual Certificate at the time of the
sale or exchange. In addition to reporting the taxable income of the REMIC, a
Residual Holder will have taxable income to the extent that any cash
distribution to him from the REMIC exceeds such adjusted basis on that
Distribution Date. Such income will be treated as gain from the sale or
exchange of the Residual Certificate. It is possible that the termination of
the REMIC may be treated as a sale or exchange of a Residual Holder's Residual
Certificate, in which case, if the Residual Holder has an adjusted basis in his
Residual Certificate remaining when his interest in the REMIC terminates, and
if he holds such Residual Certificate as a capital asset, then he will
recognize a capital loss at that time in the amount of such remaining adjusted
basis.
Except as provided in Treasury Regulations, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Certificates where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six
months after such sale or disposition, acquires (or enters into any other
transaction that results in the application of Code Section 1091) any residual
interest in any REMIC or any interest in a "taxable mortgage pool" that is
economically comparable to a Residual Certificate.
Certain Other Taxes on the REMIC. The REMIC provisions of the Code impose a
100% tax on any net income derived by a REMIC from certain prohibited
transactions. Such transactions are: (i) any disposition of a qualified
mortgage, other than pursuant to the substitution of a qualified replacement
mortgage for a qualified mortgage (or the repurchase in lieu of substitution of
a defective obligation), a disposition incident to the foreclosure, default, or
imminent default of a mortgage, the bankruptcy or insolvency of the REMIC, or a
qualified liquidation of the REMIC; (ii) the receipt of income from assets
other than qualified mortgages and permitted investments; (iii) the receipt of
compensation for services; and (iv) the receipt of gain from the dispositions
of cash flow investments. The REMIC Regulations provide that the modification
of the terms of a Loan occasioned by default or a reasonably foreseeable
default of the Loan, the assumption of the Loan, the waiver of a due-on-sale
clause or the conversion of an interest rate by an Obligor pursuant to the
terms of a convertible adjustable-rate Loan will not be treated as a
disposition of the Loan. In the event that a REMIC holds Convertible ARM Loans
which are convertible at the option of the Obligor into fixed-rate, fully
amortizing, level payment Loans, a sale of such Loans by the REMIC pursuant to
a purchase agreement or
45
<PAGE>
other contract with the Company or other party, if and when the Obligor elects
to so convert the terms of the Loan, will not result in a prohibited
transaction for the REMIC. The Code also imposes a 100% tax on contributions to
a REMIC made after the Startup Day, unless such contributions are payments made
to facilitate a cleanup call or a qualified liquidation of the REMIC, payments
in the nature of a guaranty, contributions during the three-month period
beginning on the Startup Day or contributions to a qualified reserve fund of
the REMIC by a holder of a residual interest in the REMIC. The Code also
imposes a tax on a REMIC at the highest corporate rate on certain net income
from foreclosure property that the REMIC derives from the management, sale, or
disposition of any real property, or any personal property incident thereto,
acquired by the REMIC in connection with the default or imminent default of a
loan. Generally, it is not anticipated that a REMIC will incur a significant
amount of such taxes or any material amount of state or local income or
franchise taxes. However, if any such taxes are imposed on a REMIC they will be
paid by the Company or the Trustee, if due to the breach of the Company's or
the Trustee's obligations, as the case may be, under the related Pooling and
Servicing Agreement or in other cases, such taxes shall be borne by the related
Trust Fund resulting in a reduction in amounts otherwise payable to holders of
the related Regular or Residual Certificates.
Liquidation of the REMIC. A REMIC may liquidate without the imposition of
entity-level tax only in a "qualified liquidation." A liquidation is considered
qualified if a REMIC adopts a plan of complete liquidation (which may be
accomplished by designating in the REMIC's final tax return a date on which
such adoption is deemed to occur) and sells all of its assets (other than cash)
within the ninety-day period beginning on the date of the adoption of the plan
of liquidation, provided that it distributes to holders of Regular or Residual
Certificates, on or before the last day of the ninety-day liquidation period,
all the proceeds of the liquidation (including all cash), less amounts retained
to meet claims.
Taxation of Certain Foreign Investors. For purposes of this discussion, a
"Foreign Holder" is a Certificateholder who holds a Regular Certificate and who
is not (i) a citizen or resident of the United States, (ii) a corporation,
partnership, or other entity organized in or under the laws of the United
States or a political subdivision thereof, (iii) an estate the income of which
is includible in gross income for United States tax purposes regardless of its
source, or (iv) a trust if (A) a court within the United States is able to
exercise primary supervision over the administration of the trust and (B) one
or more United States trustees have authority to control all substantial
decisions of the trust. Unless the interest on a Regular Certificate is
effectively connected with the conduct by the Foreign Holder of a trade or
business within the United States, the Foreign Holder is not subject to federal
income or withholding tax on interest (or original issue discount, if any) on a
Regular Certificate (subject to possible backup withholding of tax, discussed
below). To qualify for this tax exemption, the Foreign Holder will be required
to provide periodically a statement signed under penalties of perjury
certifying that the Foreign Holder meets the requirements for treatment as a
Foreign Holder and providing the Foreign Holder's name and address. The
statement, which may be made on a Form W-8 or substantially similar substitute
form, generally must be provided in the year a payment occurs or in either of
the two preceding years. The statement must be provided, either directly or
through clearing organization or financial institution intermediaries, to the
person that otherwise would withhold tax. This exemption may not apply to a
Foreign Holder that owns both Regular Certificates and Residual Certificates.
If the interest on a Regular Certificate is effectively connected with the
conduct by a Foreign Holder of a trade or business within the United States,
then the Foreign Holder will be subject to tax at regular graduated rates. In
addition, the foregoing rules will not apply to exempt a U.S. shareholder of a
controlled foreign corporation from taxation on such U.S. shareholder's
allocable portion of the interest income received by such controlled foreign
corporation. Foreign Holders should consult their own tax advisors regarding
the specific tax consequences of their owning a Regular Certificate.
Any gain recognized by a Foreign Holder upon a sale, retirement or other
taxable disposition of a Regular Certificate generally will not be subject to
United States federal income tax unless either (i) the Foreign Holder is a
nonresident alien individual who holds the Regular Certificate as a capital
asset and who is present in the United States for 183 days or more in the
taxable year of the disposition and either the gain is attributable to an
office or other fixed place of business maintained in the U.S. by the
individual or the individual has a "tax
46
<PAGE>
home" in the United States, or (ii) the gain is effectively connected with the
conduct by the Foreign Holder of a trade or business within the United States.
It appears that a Regular Certificate will not be included in the estate of a
Foreign Holder and will not be subject to United States estate taxes. However,
Foreign Holders should consult their own tax advisors regarding estate tax
consequences.
Unless otherwise stated in the related Prospectus Supplement, transfers of
Residual Certificates to Foreign Holders will be prohibited by the related
Agreement.
Backup Withholding. Under certain circumstances, a REMIC Certificateholder
may be subject to "backup withholding" at a 31% rate. Backup withholding may
apply to a REMIC Certificateholder who is a United States person if the holder,
among other circumstances, fails to furnish his Social Security number or other
taxpayer identification number to the Trustee. Backup withholding may apply,
under certain circumstances, to a REMIC Certificateholder who is a foreign
person if the REMIC Certificateholder fails to provide the Trustee or the REMIC
Certificateholder's securities broker with the statement necessary to establish
the exemption from federal income and withholding tax on interest on the REMIC
Certificate. Backup withholding, however, does not apply to payments on a
Certificate made to certain exempt recipients, such as corporations and tax-
exempt organizations, and to certain foreign persons. REMIC Certificateholders
should consult their tax advisors for additional information concerning the
potential application of backup withholding to payments received by them with
respect to a Certificate.
Reporting Requirements and Tax Administration. The Company will report
annually to the Service, holders of record of the Regular Certificates that are
not excepted from the reporting requirements and, to the extent required by the
Code, other interested parties, information with respect to the interest paid
or accrued on the Regular Certificates, original issue discount, if any,
accruing on the Regular Certificates and information necessary to compute the
accrual of any market discount or the amortization of any premium on the
Regular Certificates.
The Treasury Department has issued temporary regulations concerning certain
aspects of REMIC tax administration. Under those regulations, a Residual
Certificateholder must be designated as the REMIC's "tax matters person." The
tax matters person, generally, has responsibility for overseeing and providing
notice to the other Residual Certificateholders of certain administrative and
judicial proceedings regarding the REMIC's tax affairs. Unless otherwise
indicated in the related Prospectus Supplement, the Company will be designated
as tax matters person for each REMIC, and in conjunction with the Trustee will
act as the agent of the Residual Certificateholders in the preparation and
filing of the REMIC's federal and state income tax and other information
returns.
Non-REMIC Series
Tax Status of the Trust Fund. In the case of a Trust Fund evidenced by a
series of Certificates, or a segregated portion thereof, with respect to which
a REMIC Election is not made ("Non-REMIC Certificates"), Counsel will, unless
otherwise specified in the related Prospectus Supplement, have advised the
Company that, in their opinion, each Loan Pool and the arrangement to be
administered by the Company under which the Trustee will hold and the Company
will be obligated to service the Loans and pursuant to which Non-REMIC
Certificates will be issued to Non-REMIC Certificateholders will not be
classified as an association taxable as a corporation or a "taxable mortgage
pool", within the meaning of Code Section 7701(i), but rather will be
classified as a grantor trust under Subpart E, Part I of Subchapter J of the
Code. In such event, each Non-REMIC Certificateholder will be treated as the
owner of a pro rata undivided interest in the ordinary income and corpus
portions of the trust attributable to the Loan Pool in which its Certificate
evidences an ownership interest and will be considered the equitable owner of a
pro rata undivided interest in each of the Loans included therein. The
following discussion assumes the Trust Fund will be so classified as a grantor
trust.
47
<PAGE>
Tax Status of Non-REMIC Certificates. In general, (i) Certificates held by a
"domestic building and loan association" within the meaning of Section
7701(a)(19) of the Code may be considered to represent "loans secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C)(v) of
the Code; and (ii) Certificates held by a real estate investment trust may
constitute "real estate assets" within the meaning of Section 856(c)(5)(A) of
the Code and interest thereon may be considered "interest on obligations
secured by mortgages on real property" within the meaning of Section
856(c)(3)(B) of the Code. See the discussions of such Code provisions above
under "REMIC Series Tax Status of REMIC Certificates." Investors should review
the related Prospectus Supplement for a discussion of the treatment of Non-
REMIC Certificates and Loans under these Code sections and should, in addition,
consult with their own tax advisors with respect to these matters.
Tax Treatment of Non-REMIC Certificates. Subject to the discussion below of
the "stripped bond" rules of the Code, Non-REMIC Certificateholders will be
required to report on their federal income tax returns, and in a manner
consistent with their respective methods of accounting, their pro rata share of
the entire income arising from the Loans comprising such Loan Pool, including
interest, market or original issue discount, if any, prepayment fees,
assumption fees, and late payment charges received by the Company, and any gain
upon disposition of such Loans. (For purposes of this discussion, the term
"disposition," when used with respect to the Loans, includes scheduled or
prepaid collections with respect to the Loans, as well as the sale or exchange
of a Non-REMIC Certificate.) Subject to the discussion below of certain
limitations on itemized deductions, Non-REMIC Certificateholders will be
entitled under Section 162 or 212 of the Code to deduct their pro rata share of
related servicing fees, administrative and other non-interest expenses,
including assumption fees and late payment charges retained by the Company. An
individual, an estate, or a trust that holds a Non-REMIC Certificate either
directly or through a pass-through entity will be allowed to deduct such
expenses under Section 212 of the Code only to the extent that, in the
aggregate and combined with certain other itemized deductions, they exceed 2%
of the adjusted gross income of the holder. In addition, Section 68 of the Code
provides that the amount of itemized deductions (including those provided for
in Section 212 of the Code) otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds a threshold amount specified in
the Code ($196,600 for 1999, in the case of a joint return) will be reduced by
the lesser of (i) 3% of the excess of adjusted gross income over the specified
threshold amount or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. Furthermore, in determining the alternative
minimum taxable income of an individual, trust, estate or pass-through entity
that is a holder of a Non-REMIC Certificate, no deduction will be allowed for
such holder's allocable portion of the foregoing expenses, even though an
amount equal to the total of such expenses will be included in such holder's
gross income for alternative minimum tax purposes. To the extent that a Non-
REMIC Certificateholder is not permitted to deduct servicing fees allocable to
a Non-REMIC Certificate, the taxable income of the Non-REMIC Certificateholder
attributable to that Non-REMIC Certificate will exceed the net cash
distributions related to such income. Non-REMIC Certificateholders may deduct
any loss on disposition of the Loans to the extent permitted under the Code.
To the extent that any of the Loans comprising a Loan Pool were originated on
or after March 2, 1984 and under circumstances giving rise to original issue
discount, Certificateholders will be required to report annually an amount of
additional interest income attributable to such discount in such Loans prior to
receipt of cash related to such discount. See the discussion above under "REMIC
Series--Original Issue Discount." Similarly, Code provisions concerning market
discount and amortizable premium will apply to the Loans comprising a Loan Pool
to the extent that the loans were originated after July 18, 1984 and September
27, 1985, respectively. See the discussions above under "REMIC Series--Market
Discount" and "REMIC Series--Amortizable Premium." However, it is unclear
whether a prepayment assumption should be used in accruing or amortizing any
such discount or premium.
Stripped Non-REMIC Certificates. Certain classes of Non-REMIC Certificates
may be subject to the stripped bond rules of Section 1286 of the Code and for
purposes of this discussion will be referred to as "Stripped Certificates." In
general, a Stripped Certificate will be subject to the stripped bond rules
where there
48
<PAGE>
has been a separation of ownership of the right to receive some or all of the
principal payments on a Loan from ownership of the right to receive some or all
of the related interest payments. Non-REMIC Certificates will constitute
Stripped Certificates and will be subject to these rules under various
circumstances, including the following: (i) if any servicing compensation is
deemed to exceed a reasonable amount; (ii) if the Company or any other party
retains a Retained Yield with respect to the Loans comprising a Loan Pool;
(iii) if two or more classes of Non-REMIC Certificates are issued representing
the right to non-pro rata percentages of the interest or principal payments on
the Loans; or (iv) if Non-REMIC Certificates are issued which represent the
right to interest only payments or principal only payments.
Although not entirely clear, each Stripped Certificate should be considered
to be a single debt instrument issued on the day it is purchased for purposes
of calculating any original issue discount. Original issue discount with
respect to a Stripped Certificate, if any, must be included in ordinary gross
income for federal income tax purposes as it accrues in accordance with the
constant-yield method that takes into account the compounding of interest and
such accrual of income may be in advance of the receipt of any cash
attributable to such income. See "REMIC Series--Original Issue Discount" above.
For purposes of applying the original issue discount provisions of the Code,
the issue price of a Stripped Certificate will be the purchase price paid by
each holder thereof and the stated redemption price at maturity may include the
aggregate amount of all payments to be made with respect to the Stripped
Certificate whether or not denominated as interest. The amount of original
issue discount with respect to a Stripped Certificate may be treated as zero
under the original issue discount de minimis rules described above. A purchaser
of a Stripped Certificate will be required to account for any discount on the
certificate as market discount rather than original issue discount if either
(i) the amount of original issue discount with respect to the certificate was
treated as zero under the original issue discount de minimis rule when the
certificate was stripped or (ii) no more than 100 basis points (including any
amount of servicing in excess of reasonable servicing) is stripped off of the
Loans. See "REMIC Series--Market Discount" above.
Although the OID Regulations suggest that a prepayment assumption is not to
be used in computing the yield on the underlying assets of a Trust Fund with
respect to which a REMIC election is not made, the Code appears to require that
such a prepayment assumption be used in computing yield with respect to
Stripped Certificates. In the absence of authority to the contrary, the Company
intends to base information reports and returns to the Service and the holders
of Stripped Certificates taking into account an appropriate prepayment
assumption. Holders of Stripped Certificates should refer to the related
Prospectus Supplement to determine whether and in what manner the original
issue discount rules will apply thereto.
When an investor purchases more than one class of Stripped Certificates it is
currently unclear whether for federal income tax purposes such classes of
Stripped Certificates should be treated separately or aggregated for purposes
of applying the original issue discount rules described above.
It is possible that the Service may take a contrary position with respect to
some or all of the foregoing tax consequences. For example, a holder of a
Stripped Certificate may be treated as the owner of (i) as many stripped bonds
or stripped coupons as there are scheduled payments of principal and/or
interest on each Loan or (ii) a separate installment obligation for each Loan
representing the Stripped Certificate's pro rata share of principal and/or
interest payments to be made with respect thereto. As a result of these
possible alternative characterizations, investors should consult their own tax
advisors regarding the proper treatment of Stripped Certificates for federal
income tax purposes.
The servicing compensation to be received by the Company and the fee for
credit enhancement, if any, may be questioned by the Service with respect to
certain Certificates or Loans as exceeding a reasonable fee for the services
being performed in exchange therefor, and a portion of such servicing
compensation could be recharacterized as an ownership interest retained by the
Company or other party in a portion of the interest payments to be made
pursuant to the Loans. In this event, a Certificate might be treated as a
Stripped Certificate subject to the stripped bond rules of Section 1286 of the
Code and the original issue discount provisions rather than to the market
discount and premium rules.
49
<PAGE>
Gain or Loss on Disposition. Upon sale or exchange of a Non-REMIC
Certificate, a Non-REMIC Certificateholder will recognize gain or loss equal to
the difference between the amount realized in the sale and its aggregate
adjusted basis in the Loans represented by the Non-REMIC Certificate.
Generally, the aggregate adjusted basis will equal the Non-REMIC
Certificateholder's cost for the Non-REMIC Certificate increased by the amount
of any previously reported income or gain with respect to the Non-REMIC
Certificate and decreased by the amount of any losses previously reported with
respect to the Non-REMIC Certificate and the amount of any distributions
received thereon. Except as provided above with respect to the original issue
discount and market discount rules, any such gain or loss would be capital gain
or loss if the Non-REMIC Certificate was held as a capital asset.
Tax Treatment of Certain Foreign Investors. Generally, interest or original
issue discount paid to or accruing for the benefit of a Non-REMIC
Certificateholder who is a Foreign Holder (as defined above under "REMIC
Series--Taxation of Certain Foreign Investors") will be treated as "portfolio
interest" and therefore will be exempt from the 30% withholding tax. Such Non-
REMIC Certificateholder will be entitled to receive interest payments and
original issue discount on the Non-REMIC Certificates free of United States
federal income tax, but only to the extent the Loans were originated after July
18, 1984 and provided that such Non-REMIC Certificateholder periodically
provides the Trustee (or other person who would otherwise be required to
withhold tax) with a statement certifying under penalty of perjury that such
Non-REMIC Certificateholder is not a United States person and providing the
name and address of such Non-REMIC Certificateholder. For additional
information concerning interest or original issue discount paid by the Company
to a Foreign Holder and the treatment of a sale or exchange of a Non-REMIC
Certificate by a Foreign Holder, which will generally have the same tax
consequences as the sale of a Regular Certificate, see the discussion above
under "REMIC Series--Taxation of Certain Foreign Investors."
Tax Administration and Reporting. The Company will furnish to each Non-REMIC
Certificateholder with each distribution a statement setting forth the amount
of such distribution allocable to principal and to interest. In addition, the
Company will furnish, within a reasonable time after the end of each calendar
year, to each Non-REMIC Certificateholder who was a Certificateholder at any
time during such year, information regarding the amount of servicing
compensation received by the Company and any sub-servicer and such other
customary factual information as the Company deems necessary or desirable to
enable Certificateholders to prepare their tax returns. Reports will be made
annually to the Service and to holders of record that are not excepted from the
reporting requirements regarding information as may be required with respect to
interest and original issue discount, if any, with respect to the Non-REMIC
Certificates.
Other Tax Consequences
No advice has been received as to local income, franchise, personal property,
or other taxation in any state or locality, or as to the tax effect of
ownership of Certificates in any state or locality. Certificateholders are
advised to consult their own tax advisors with respect to any state or local
income, franchise, personal property, or other tax consequences arising out of
their ownership of Certificates.
LEGAL INVESTMENT CONSIDERATIONS
Unless otherwise indicated in the applicable Prospectus Supplement, any
Certificates offered hereby are not expected to constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") because there will be a substantial number of Loans that are
secured by liens on real estate that are not first liens, as required by SMMEA.
Accordingly, many institutions with legal authority to invest in "mortgage
related securities" may not be legally authorized to invest in the
Certificates.
The Federal Financial Institutions Examination Council, The Federal Deposit
Insurance Corporation, the Office of Thrift Supervision, the Office of the
Comptroller of the Currency and the National Credit Union Administration have
proposed or adopted guidelines regarding investment in various types of
mortgage-backed
50
<PAGE>
securities. In addition, certain state regulators have taken positions that may
prohibit regulated institutions subject to their jurisdiction from holding
securities representing residual interests, including securities previously
purchased. There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Certificates or to
purchase Certificates representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the Certificates constitute legal
investments for such investors.
RATINGS
It is a condition precedent to the issuance of any Class of Certificates sold
under this Prospectus that they be rated by at least one nationally recognized
statistical rating organization in one of its four highest rating categories
(within which there may be sub-categories or gradations indicating relative
standing). A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating agency. The security rating of any Series of Certificates
should be evaluated independently of similar security ratings assigned to other
kinds of securities.
UNDERWRITING
The Company may sell Certificates of each Series to or through underwriters
(the "Underwriters") by a negotiated firm commitment underwriting and public
reoffering by the Underwriters, and also may sell and place Certificates
directly to other purchasers or through agents. The Company intends that
Certificates will be offered through such various methods from time to time and
that offerings may be made concurrently through more than one of these methods
or that an offering of a particular Series of Certificates may be made through
a combination of such methods.
The distribution of the Certificates may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Company or any affiliate thereof may purchase some or all of
one or more Classes of Certificates of such Series from the Underwriter or
Underwriters at a price specified in such Prospectus Supplement. Such purchaser
may thereafter from time to time offer and sell, pursuant to this Prospectus,
some or all of such Certificates so purchased directly, through one or more
Underwriters to be designated at the time of the offering of such Certificates
or through broker-dealers acting as agent and/or principal. Such offering may
be restricted in the manner specified in such Prospectus Supplement. Such
transactions may be effected at market prices prevailing at the time of sale,
at negotiated prices or at fixed prices.
In connection with the sale of the Certificates, Underwriters may receive
compensation from the Company or from purchasers of Certificates for whom they
may act as agents in the form of discounts, concessions or commissions.
Underwriters may sell the Certificates of a Series to or through dealers and
such dealers may receive compensation in the form of discounts, concessions or
commissions from the Underwriters and/or commissions from the purchasers for
whom they may act as agents. Underwriters, dealers and agents that participate
in the distribution of the Certificates of a Series may be deemed to be
Underwriters, and any discounts or commissions received by them from the
Company and any profit on the resale of the Certificates by them may be deemed
to be underwriting discounts and commissions, under the Securities Act of 1933,
as amended (the "Securities Act"). Any such Underwriters or agents will be
identified, and any such compensation received from the Company will be
described, in the Prospectus Supplement.
Under agreements which may be entered into by the Company, Underwriters and
agents who participate in the distribution of the Certificates may be entitled
to indemnification by the Company against certain liabilities, including
liabilities under the Securities Act.
51
<PAGE>
If so indicated in the Prospectus Supplement, the Company will authorize
Underwriters or other persons acting as the Company's agents to solicit offers
by certain institutions to purchase the Certificates from the Company pursuant
to contracts providing for payment and delivery on a future date. Institutions
with which such contracts may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational
charitable institutions and others, but in all cases such institutions must be
approved by the Company. The obligation of any purchaser under any such
contract will be subject to the condition that the purchaser of the offered
Certificates shall not at the time of delivery be prohibited under the laws of
the jurisdiction to which such purchaser is subject from purchasing such
Certificates. The Underwriters and such other agents will not have
responsibility in respect of the validity or performance of such contracts.
The Underwriters may, from time to time, buy and sell Certificates, but there
can be no assurance that an active secondary market will develop and there is
no assurance that any such market, if established, will continue.
Certain of the Underwriters and their associates may engage in transactions
with and perform services for the Company in the ordinary course of business.
LEGAL MATTERS
The legality and material federal income tax consequences of the Certificates
will be passed upon for the Company by the counsel to the Company identified in
the applicable Prospectus Supplement.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1997
and for each of the years in the three-year period ended December 31, 1997
incorporated by reference herein have been audited by KPMG Peat Marwick LLP,
independent accountants, as stated in their opinion given upon their authority
as experts in accounting and auditing.
52
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
For 90 days after the date of this prospectus supplement, all dealers
that effect transactions in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. This is in addition to
the dealers' obligation to deliver a copy of this prospectus supplement and the
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
[GreenTree Logo]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
